nep-mst New Economics Papers
on Market Microstructure
Issue of 2017‒12‒11
four papers chosen by
Thanos Verousis
University of Newcastle

  1. Estimation for high-frequency data under parametric market microstructure noise By Simon Clinet; Yoann Potiron
  2. Intraday Seasonality in Efficiency, Liquidity, Volatility and Volume: Platinum and Gold Futures in Tokyo and New York By Kentaro Iwatsubo; Clinton Watkins; Tao Xu
  3. Relationship Trading in OTC Markets By Hendershott, Terrence; Li, Dan; Livdan, Dmitry; Schürhoff, Norman
  4. Brokers and Order Flow Leakage: Evidence from Fire Sales By Andrea Barbon; Marco Di Maggio; Francesco Franzoni; Augustin Landier

  1. By: Simon Clinet; Yoann Potiron
    Abstract: In this paper, we propose a general class of noise-robust estimators based on the existing estimators in the non-noisy high-frequency data literature. The market microstructure noise is a known parametric function of the limit order book. The noise-robust estimators are constructed as a plug-in version of their counterparts, where we replace the efficient price, which is non-observable in our framework, by an estimator based on the raw price and the limit order book data. We show that the technology can be directly applied to estimate volatility, high-frequency covariance, functionals of volatility and volatility of volatility in a general nonparametric framework where, depending on the problem at hand, price possibly includes infinite jump activity and sampling times encompass asynchronicity and endogeneity.
    Date: 2017–12
  2. By: Kentaro Iwatsubo (Graduate School of Economics, Kobe University); Clinton Watkins (Graduate School of Economics, Kobe University); Tao Xu (Graduate School of Economics, Kobe University)
    Abstract: We investigate intraday seasonality in, and relationships between, informational efficiency, volatility, volume and liquidity. Platinum and gold, both traded in overlapping sessions in Tokyo and New York, provide an interesting comparison because Tokyo is an internationally important trading venue for platinum but not for gold. Our analysis indicates that both platinum and gold markets in Tokyo are dominated by uninformed trading, while there is evidence supporting both uninformed and informed trading in New York. Separating global trading hours into Tokyo, London and New York day sessions, we also find that uninformed trading is more prevalent during the Tokyo day session while informed trading dominates the New York day session for both metals in both locations. This evidence suggests that futures markets for the same underlying commodity on different exchanges have different microstructure characteristics, while both informed and uninformed traders choose when to trade depending on market characteristics in different time zones.
    Keywords: intraday patterns, microstructure, efficiency, commodity futures
    JEL: G14 G15 Q02
    Date: 2017–11
  3. By: Hendershott, Terrence; Li, Dan; Livdan, Dmitry; Schürhoff, Norman
    Abstract: We examine the network of trading relations between insurers and dealers in the over-the-counter corporate bond market. Comprehensive regulatory data shows that many insurers use only one dealer while the largest insurers have networks of up to forty dealers. Large insurers receive better prices than small insurers. However, execution costs are a non-monotone function of the network size, increasing once the network size exceeds 20 dealers. To understand these facts we build a model of decentralized trade in which insurers trade off the benefits of repeat business against dealer competition. The model can quantitatively fit the distribution of insurers' network sizes and how prices depend on insurers' size.
    Keywords: corporate bond; Decentralization; Financial Networks; liquidity; Over-the-counter market; trading cost
    JEL: G12 G14 G24
    Date: 2017–11
  4. By: Andrea Barbon; Marco Di Maggio; Francesco Franzoni; Augustin Landier
    Abstract: Using trade-level data, we study whether brokers play a role in spreading order flow information. We focus on large portfolio liquidations, which result in temporary drops in stock prices, and identify the brokers that intermediate these trades. We show that these brokers’ best clients tend to predate on the liquidating funds: at the beginning of the fire sale, they sell their holdings in the liquidated stocks, to then cover their positions once asset prices start recovering. The predatory trades generate at least 50 basis points over ten days and cause the liquidation costs for the distressed fund to almost double. These results suggest a role of brokers in fostering predatory behavior and raise a red flag for regulators. Moreover, our findings highlight the trade-off between slow execution and potential information leakage in the decision of optimal trading speed.
    JEL: G12 G14 G23 G33
    Date: 2017–11

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