nep-mst New Economics Papers
on Market Microstructure
Issue of 2018‒09‒17
four papers chosen by
Thanos Verousis

  1. How does latent liquidity get revealed in the limit order book? By Lorenzo Dall'Amico; Antoine Fosset; Jean-Philippe Bouchaud; Michael Benzaquen
  2. Spoofing and Pinging in Foreign Exchange Markets By Alexis Stenfors; Masayuki Susai
  3. Copy trading By Jose Apesteguia; Jörg Oechssler; Simon Weidenholzer
  4. Dynamic price discovery in the European wheat market based on the concept of partial cointegration By Vollmer, T.; Von Cramon-Taubadel, S.

  1. By: Lorenzo Dall'Amico; Antoine Fosset; Jean-Philippe Bouchaud; Michael Benzaquen
    Abstract: Latent order book models have allowed for significant progress in our understanding of price formation in financial markets. In particular they are able to reproduce a number of stylized facts, such as the square-root impact law. An important question that is raised -- if one is to bring such models closer to real market data -- is that of the connection between the latent (unobservable) order book and the real (observable) order book. Here we suggest a simple, consistent mechanism for the revelation of latent liquidity that allows for quantitative estimation of the latent order book from real market data. We successfully confront our results to real order book data for over a hundred assets and discuss market stability. One of our key theoretical results is the existence of a market instability threshold, where the conversion of latent order becomes too slow, inducing liquidity crises. Finally we compute the price impact of a metaorder in different parameter regimes.
    Date: 2018–08
  2. By: Alexis Stenfors (University of Portsmouth); Masayuki Susai (Nagasaki University)
    Abstract: This paper investigates the susceptibility of FX spot markets to limit order submission strategies that are either intended to create a false impression of the state of the market ('spoof orders') or to extract hidden information in the market ('ping orders'). Using a complete limit order book dataset from EBS, we study currency pairs that have mature algorithmic markets (EUR/USD and USD/JPY), as well as other G10 and emerging market currencies where EBS is used as a secondary electronic trading platform (EUR/SEK, USD/RUB and USD/TRY). Our results, indicating that EUR/USD and USD/JPY are highly sensitive to information-rich orders, suggests that spoofing tactics might be more dependent on the chosen electronic trading venue, rather than the overall market liquidity of the currency pairs. Furthermore, we find widespread adoption of pinging tactics in the EUR/SEK and USD/RUB markets.
    Keywords: market microstructure, limit order book, foreign exchange, high-frequency trading, manipulation, spoofing, pinging, stealth trading
    JEL: D4 F3
    Date: 2018–09–13
  3. By: Jose Apesteguia; Jörg Oechssler; Simon Weidenholzer
    Abstract: Copy trading allows traders in social networks to receive information on the success of other agents in financial markets and to directly copy their trades. Internet platforms like eToro, ZuluTrade, and Tradeo have attracted millions of users in recent years. The present paper studies the implications of copy trading for the risk taking of investors. Implementing an experimental financial asset market, we show that providing information on the success of others leads to a significant increase in risk taking of subjects. This increase in risk taking is even larger when subjects are provided with the option to directly copy others. We conclude that copy trading reduces ex-ante welfare, and leads to excessive risk taking.
    Keywords: Copy trading, financial markets, social networks, imitation; experiment.
    JEL: C91 D81 G12 G20
    Date: 2018–07
  4. By: Vollmer, T.; Von Cramon-Taubadel, S.
    Abstract: Understanding the pricing process in agricultural spot and futures markets is important for every market participant. In this article we analyse price discovery in the European wheat market based on the partial cointegration approach recently introduced by Clegg and Krauss (2017). Partial cointegration allows for not only transient but also persistent shocks to the long-run equilibrium relationship between two or more variables. By combining the concept of partial cointegration with state space modelling we are able to generate time-variant price discovery metrics that allow for shifts in the long-run relationship between futures and spot prices, for example due to changes in the quality composition of the wheat harvest from year to year, or due to changes in the specification of the futures contact. We find that price discovery is in general dominated by the futures market but that the spot market takes on greater significance for the pricing process during phases of higher price volatility. We also find evidence that the persistent shocks the long-run relationship between spot and futures prices estimated by the partial cointegration method are affected by the availability of high-quality wheat on the spot market.
    Keywords: Agricultural and Food Policy, Demand and Price Analysis, International Relations/Trade
    Date: 2018–07

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