nep-mst New Economics Papers
on Market Microstructure
Issue of 2019‒02‒25
five papers chosen by
Thanos Verousis

  1. Market Impact: A Systematic Study of the High Frequency Options Market By Emilio Said; Ahmed Bel Hadj Ayed; Damien Thillou; Jean-Jacques Rabeyrin; Frédéric Abergel
  2. Over-the-Counter Market Liquidity and Securities Lending By Nathan Foley-Fisher; Stefan Gissler; Stephane Verani
  3. Eyes on the Price: Which Power Generation Technologies Set the Market Price? Price Setting in European Electricity Markets: An Application to the Proposed Dutch Carbon Price Floor By Eike Blume-Werry; Thomas Faber; Lion Hirth; Claus Huber; Martin Everts
  4. The Impact of Shanghai-Hong Kong Stock Connect on the Effectiveness of Price Limits in the Chinese Stock Market By Chong, Terence Tai Leung; Kwok, Stanley
  5. Strategic Speed Choice by High-Frequency Traders under Speed Bumps By Jun Aoyagi

  1. By: Emilio Said (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris - CentraleSupélec, MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec, Global Markets, BNP Paribas, Paris); Ahmed Bel Hadj Ayed (Global Markets, BNP Paribas, Paris); Damien Thillou (Global Markets, BNP Paribas, Paris); Jean-Jacques Rabeyrin (Global Markets, BNP Paribas, Paris); Frédéric Abergel (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris - CentraleSupélec, MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec, BNP Paribas Asset Management, Paris)
    Abstract: This paper deals with a fundamental subject that has seldom been addressed in recent years, that of market impact in the options market. Our analysis is based on a proprietary database of metaorders-large orders that are split into smaller pieces before being sent to the market on one of the main Asian markets. In line with our previous work on the equity market [Said et al., 2018], we propose an algorithmic approach to identify metaorders, based on some implied volatility parameters, the at the money forward volatility and at the money forward skew. In both cases, we obtain results similar to the now well understood equity market: Square-root law, Fair Pricing Condition and Market Impact Dynamics.
    Keywords: High Frequency,Fair Pricing,Implied Volatility,Statistical Finance,Market Microstructure,Automated Trading,Options Market,Limit Orders,Market Impact
    Date: 2019–02–11
  2. By: Nathan Foley-Fisher; Stefan Gissler; Stephane Verani
    Abstract: This paper studies how over-the-counter market liquidity is affected by securities lending. We combine micro-data on corporate bond market trades with securities lending transactions and individual corporate bond holdings by U.S. insurance companies. Applying a difference-in-differences empirical strategy, we show that the shutdown of AIG's securities lending program in 2008 caused a statistically and economically significant reduction in the market liquidity of corporate bonds predominantly held by AIG. We also show that an important mechanism behind the decrease in corporate bond liquidity was a shift towards relatively small trades among a greater number of dealers in the interdealer market.
    Keywords: Broker-dealers ; Corporate bonds ; Insurance companies ; Market liquidity ; Over-the-counter markets ; Securities lending
    JEL: G01 G12 G23 G22
    Date: 2019–02–19
  3. By: Eike Blume-Werry (Energy Economics Group (EEG), Institute of Energy Systems and Electric Drives TU Wien and Axpo Holding AG); Thomas Faber (Axpo Holding AG); Lion Hirth (Neon Neue Energieökonomik GmbH (Neon) and Hertie School of Governance); Claus Huber (Axpo Holding AG); Martin Everts (Axpo Holding AG)
    Abstract: Upon discussion of price setting on electricity wholesale markets, many refer to the so-called merit order model. Conventional wisdom holds that during most hours of the year, coal- or natural gas-fired power plants set the price on European markets. In this context, this paper analyses price setting on European power markets. We use a fundamental electricity market model of interconnected bidding zones to determine hourly price-setting technologies for the year 2020. We find a price-setting pattern that is more complex and nuanced than the conventional wisdom suggests: across all researched countries, coal- and natural gas-fired power plants set the price for only 40 per cent of all hours. Other power generation technologies such as wind, biomass, hydro and nuclear power plants as well as lignite-fired plants set the price during the rest of the year. On some markets, the price setting is characterised by a high level of interconnectivity and thus foreign influence – as illustrated by the example of the Netherlands. During some 75 per cent of hours, foreign power plants set the price on the Dutch market, whilst price setting in other more isolated markets is barely affected by foreign markets. Hence, applying the price setting analysis to the proposed Dutch carbon price floor, we show that different carbon prices have little effect on the technological structure of the price-setting units. In this respect, the impacts of the unilateral initiative are limited. There are, however, considerable changes to be observed in wholesale power prices, import/export balances as well as production volumes and subsequent CO2 outputs of lignite-, coal- and gas-fired power plants.
    Keywords: Price Setting, Electricity Markets, Merit Order, Generation Technologies, Carbon Price Floor
    JEL: O13 Q41
    Date: 2018–12
  4. By: Chong, Terence Tai Leung; Kwok, Stanley
    Abstract: Launched in 2014, the Shanghai-Hong Kong Stock Connect (SHSC) is the first mutual access channel between the Chinese and Hong Kong equity markets. The scheme allows Hong Kong and international investors to purchase eligible Shanghai-listed shares, while at the same time permitting eligible Chinese investors to purchase eligible Hong Kong-listed shares. This paper aims to examine the impact of the scheme on the effectiveness of the price limit rule, which is only imposed in China but not in Hong Kong. Results show that the scheme alleviates the delayed price discovery problem caused by price limits but has no significant effect on the problems of volatility spillover and trading interference.
    Keywords: Stock Connect; Price Limits; Price Discovery
    JEL: G14 G15 G18
    Date: 2019–02–14
  5. By: Jun Aoyagi
    Abstract: We study how high-frequency traders (HFTs) strategically decide their speed level in a market with a random speed bump. If HFTs recognize the market impact of their speed decision, they perceive a wider bid-ask spread as an endogenous upward-sloping cost of being faster. We find that the speed elasticity of the bid-ask spread (slope of the endogenous cost function) negatively depends on the expected length of a speed bump since a longer delay makes market makers insensitive to HFTs' speed increment. Hence, speed bumps promote the investment of HFTs in high-speed technology by reducing the marginal cost of getting faster, undermining their intended purpose of protecting market makers. Depending on the expected length of a bump, an arms race among HFTs exhibits both complementarity and substitution. These findings explain the ambiguous empirical results regarding speed bumps and adverse selection for market makers.
    Date: 2019–02

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