|
on Market Microstructure |
| By: | Adrian, Tobias (Federal Reserve Bank of New York); Capponi, Agostino (Columbia University); Vogt, Erik (Federal Reserve Bank of New York); Zhang, Hongzhong (Columbia University) |
| Abstract: | The share of market making conducted by high-frequency trading (HFT) firms has been rising steadily. A distinguishing feature of HFTs is that they trade intraday, ending the day flat. To shed light on the economics of HFTs, and in a departure from existing market-making theories, we model an HFT that has access to unlimited leverage intraday but must fund any end-of-day inventory at an exogenously determined cost. Even though the inventory costs occur only at the end of the day, they impact intraday price and liquidity dynamics. This gives rise to an intraday endogenous price impact mechanism. As the end of the trading day approaches, the sensitivity of prices to inventory levels intensifies, making price impact stronger and widening bid-ask spreads. Moreover, imbalances of buy and sell orders may catalyze hikes and drops in prices, even under fixed supply and demand functions. Empirically, we show that these predictions are borne out in the U.S. Treasury market, where bid-ask spreads and price impact tend to rise toward the end of the day. Furthermore, price movements are negatively correlated with changes in inventory levels as measured by the cumulative net trading volume. |
| Keywords: | market microstructure; market liquidity; high-frequency trading; financial intermediation |
| JEL: | G01 G12 G17 |
| Date: | 2016–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:799&r=mst |
| By: | Ozlem Akin; Nicholas S. Coleman; Christian Fons-Rosen; José-Luis Peydró |
| Abstract: | We exploit the 2008-2010 TARP bank bailouts after Lehman’s failure to test for private information leakages from banking regulators to top corporate bank executives using insider trading data and information on political connections. In politically-connected banks, buying during the pre-TARP period is associated with increases in abnormal returns around TARP. For unconnected banks, insider trading and returns are uncorrelated. Results hold when comparing connected to unconnected executives within the same bank and are driven by political connections to financial branches of government. Through a FOIA request we obtained the previously unknown TARP funds requested by each bank. The ratio of requested to received funds strongly correlates with abnormal returns and is also a predictor of buying behavior by connected banks. |
| Keywords: | political connections, political economy in banking, Insider Trading, TARP |
| JEL: | D72 G01 G21 G28 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:935&r=mst |