nep-mst New Economics Papers
on Market Microstructure
Issue of 2018‒01‒29
two papers chosen by
Thanos Verousis

  1. Is Trading Fast Dangerous? By Foucault, Thierry; Moinas, Sophie
  2. Shrouding and the Foreign Exchange Trades of Global Custody Banks By Carol Osler; Tanseli Savaser

  1. By: Foucault, Thierry; Moinas, Sophie
    Abstract: The speed of trading has considerably increased in recent years, due to progress in information technologies and automation of the trading process. This evolution raises many questions about the effects of trading speed. In this chapter we discuss the findings of the growing theoretical and empirical literature on trading speed in financial markets. We argue that an increase in trading speed raises adverse selection costs but increases competition among liquidity providers and the rate at which gains from trade are realized. Thus, the effect of an increase in trading speed on market quality and welfare is inherently ambiguous. This observation is important for assessing empirical findings regarding the effects of trading speed and policy making.
    Date: 2018–01
  2. By: Carol Osler (Brandeis University); Tanseli Savaser (Vassar College)
    Abstract: Custodial forex trades generally have far higher bid-ask spreads than regular OTC trades. We develop a model of custodial liquidity provision and test it using trade records from a global custody bank. Custodial dealers set high markups and “shroud” them by exploiting their clients’ limited access to information. Market opacity becomes endogenous as custodial dealers benchmark prices to the day’s high or low (as relevant) rather than the currency’s true value. A predicted kink in the relation between client price and the interbank price is evident in scatterplots and confirmed by regressions. Custodial dealers also shroud by delaying trades.
    Date: 2018–01

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