nep-mst New Economics Papers
on Market Microstructure
Issue of 2018‒01‒15
four papers chosen by
Thanos Verousis

  1. The ambivalent role of high-frequency trading in turbulent market periods By Hautsch, Nikolaus; Noé, Michael; Zhang, S. Sarah
  2. Trading in style: Retail investors vs. institutions By Wolff, Christian C
  3. The impact of intraday markets on the market value of flexibility–Decomposing effects on profile and the imbalance costs By Christian Pape
  4. Should Retail Investors' Leverage Be Limited? By Rawley Z. Heimer; Alp Simsek

  1. By: Hautsch, Nikolaus; Noé, Michael; Zhang, S. Sarah
    Abstract: We show an ambivalent role of high-frequency traders (HFTs) in the Eurex Bund Futures market around high-impact macroeconomic announcements and extreme events. Around macroeconomic announcements, HFTs serve as market makers, post competitive spreads, and earn most of their profits through liquidity supply. Right before the announcement, however, HFTs significantly widen spreads and cause a rapid but short-lived drying-out of liquidity. In turbulent periods, such as after the U.K. Brexit announcement, HFTs shift their focus from market making activities to aggressive (but not necessarily profitable) directional strategies. Then, HFT activity becomes dominant and market quality can degrade.
    Keywords: High Frequency Trading,Market Making,News Releases,Futures Market,Brexit
    JEL: G10 G14
    Date: 2017
  2. By: Wolff, Christian C
    Abstract: We examine the comparative trading performance of retail investors using an exhaustive sample of trades made by all investors in a stock market. Retail investors trade systematically at better prices than institutions, especially domestic institutions. We also find evidence of retail investors having a comparative advantage when trading stocks in their preferred trading style. These findings are consistent with retail investors rationally utilizing their trading flexibility and information made available to them. Based on a population of retail trades, our findings challenge the stereotype arising from earlier studies that retail investors are noise traders.
    Date: 2017–11
  3. By: Christian Pape (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen (Campus Essen))
    Abstract: An increasing share of variable renewable energy sources (VREs) basically affects the electricity price formation in two ways: (1) The so-called merit order effect tends to lower the base price level and challenges conventional plants to remain profitable. (2) Due to the variable nature of renewable energy infeed, the shortterm demand for flexibility increases and changes the volatility of electricity prices. The more variable prices offer opportunities for controllable electricity producers (CEPs) to provide up- and down-ramping flexibility to increase their revenues. In contrast, the VREs with high degrees of simultaneity tend to pay for this flexibility in the electricity spot market to reduce their imbalance exposure. The intraday market (IDM) for electricity has gained importance for the market value of different technologies lately and continues to expand due to the increasing efforts to balance within-day deviation from day-ahead schedules. This article presents a combination and extension of two existing models to capture the peculiarities of the intraday price formation and to analyse the impact of the IDM on the market value of VREs and CEPs. Doing so, the paper suggests an adjustment of the classical market value factor metric and to go beyond classical day-ahead market (DAM) information. The article shows that market value factors (MVFs) can be stabilized if the IDM delivers ‘marketbased’ price signals for the costs of flexibility, that are sufficient to activate flexibilities prior to the usually more expensive imbalance mechanism (IBM). Yet, the MVFs from single VRE technologies will worsen if their market share is high enough to outweigh forecast errors from other technologies and if they become a permanent price maker in the IDM and the IBM.
    Keywords: intraday markets, imbalance mechanism, market value, renewable energy
    JEL: Q47 N74
    Date: 2017–12
  4. By: Rawley Z. Heimer; Alp Simsek
    Abstract: Does the provision of leverage to retail traders improve market quality or facilitate socially inefficient speculation that enriches financial intermediaries? This paper evaluates the effects of 2010 regulations that cap the provision of leverage to previously unregulated U.S. retail traders of foreign exchange. Using three unique data sets and a difference-in-differences approach, we document that the leverage constraint reduces trading volume by 23 percent, improves high-leverage traders' portfolio return by 18 percentage points per month (thereby alleviating their losses by 40 percent), and reduces brokerages' operating capital by 25 percent. Yet, the policy does not affect the relative bid-ask prices charged by the brokerages. The announcement of pending leverage restrictions has no effect on the traders or the market. We reconcile these findings with a model in which traders with heterogeneous and dogmatic beliefs take speculative positions in pursuit of high returns, and a competitive brokerage sector intermediates these trades subject to technological and informational costs. The model is largely consistent with our empirical findings, and it suggests that the leverage constraint policy generates a sizable belief-neutral improvement in social welfare by economizing on the productive resources used to intermediate speculation.
    JEL: G02 G11 G12 G18 G2
    Date: 2017–12

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