nep-mst New Economics Papers
on Market Microstructure
Issue of 2018‒05‒21
four papers chosen by
Thanos Verousis

  1. Judgement Day: Algorithmic Trading Around the Swiss Franc Cap Removal By Francis Breedon; Louisa Chen; Angelo Ranaldo; Nicholas Vause
  2. Trading Fees and Intermarket Competition By Marios Panayides; Barbara Rindi; Ingrid M.Werner
  3. Optimal make-take fees for market making regulation By Omar El Euch; Thibaut Mastrolia; Mathieu Rosenbaum; Nizar Touzi
  4. Sophisticated Investors and Market Efficiency: Evidence from a Natural Experiment By Yong Chen; Bryan Kelly; Wei Wu

  1. By: Francis Breedon; Louisa Chen; Angelo Ranaldo; Nicholas Vause
    Abstract: A key issue raised by the rapid growth of computerised algorithmic trading is how it responds in extreme situations. Using data on foreign exchange orders and transactions that includes identification of algorithmic trading, we find that this type of trading contributed to the deterioration of market quality following the removal of the cap on the Swiss franc on 15 January 2015, which was an event that came as a complete surprise to market participants. In particular, we find that algorithmic traders withdrew liquidity and generated uninformative volatility in Swiss franc currency pairs, while human traders did the opposite. However, we find no evidence that algorithmic trading propagated these adverse effects on market quality to other currency pairs.
    Keywords: Swiss franc, algorithmic trading, liquidity, volatility, price discovery, arbitrage opportunities
    JEL: G14 G23
    Date: 2018–02
  2. By: Marios Panayides; Barbara Rindi; Ingrid M.Werner
    Abstract: We model an order book with liquidity rebates (make fees) and trading fees (take fees) that faces intermarket competition, and use the model s insights to explain changes in market quality and market shares following changes in make-take fees. As predicted by our model, we document that fee changes by one venue a ect market quality and market shares for all venues that compete for order ow. Furthermore, we document cross-sectional di erences in changes in market quality and market shares following a simultaneous decrease in both make and take fees consistent with traders in large (small) capitalization stocks being more sensitive to the change in make (take) fees.
    Keywords: Trading Fees, Maker-Taker Pricing, Intermarket Competition, Limit Order Book
    JEL: G10 G12 G14 G18 G20 D40
    Date: 2017
  3. By: Omar El Euch; Thibaut Mastrolia; Mathieu Rosenbaum; Nizar Touzi
    Abstract: We consider an exchange who wishes to set suitable make-take fees to attract liquidity on its platform. Using a principal-agent approach, we are able to describe in quasi-explicit form the optimal contract to propose to a market maker. This contract depends essentially on the market maker inventory trajectory and on the volatility of the asset. We also provide the optimal quotes that should be displayed by the market maker. The simplicity of our formulas allows us to analyze in details the effects of optimal contracting with an exchange, compared to a situation without contract. We show in particular that it leads to higher quality liquidity and lower trading costs for investors.
    Date: 2018–05
  4. By: Yong Chen; Bryan Kelly; Wei Wu
    Abstract: We study how sophisticated investors, when faced with changes in information environment, adjust their information acquisition and trading behavior, and how these changes in turn affect market efficiency. We find that, after exogenous reductions of analyst coverage due to closures of brokerage firms, hedge funds scale up information acquisition. They trade more aggressively and earn higher abnormal returns on the affected stocks. Moreover, the participation of hedge fund significantly mitigates the impairment of market efficiency caused by coverage reductions. Our results show a substitution effect between sophisticated investors and public information providers in facilitating market efficiency in a causal framework.
    JEL: G12 G14
    Date: 2018–04

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