nep-mst New Economics Papers
on Market Microstructure
Issue of 2019‒05‒06
three papers chosen by
Thanos Verousis

  1. Tick size change and market quality in the U.S. treasury market By Fleming, Michael J.; Nguyen, Giang; Ruela, Francisco
  2. Tick Size Tolls: Can a Trading Slowdown Improve Price Discovery? By Lee, Charles M. C.; Watts, Edward M.
  3. “Testing for private information using trade duration models with unobserved market heterogeneity: The case of Banco Popular” By Jorge Pérez-Rodríguez; Emilio Gómez-Déniza; Simón Sosvilla-Rivero

  1. By: Fleming, Michael J. (Federal Reserve Bank of New York); Nguyen, Giang (Pennsylvania State University); Ruela, Francisco (Federal Reserve Bank of New York)
    Abstract: This paper studies a recent tick size reduction in the U.S. Treasury securities market and identifies its effects on the market’s liquidity and price efficiency. Employing difference-indifference regressions, we find that the bid-ask spread narrows significantly after the change, even for large trades, and that trading volume increases. Market depth declines markedly at the inside tier and across the book, but cumulative depth close to the top of the book changes little or even increases slightly. Furthermore, the smaller tick size enables prices to adjust more easily to information and better reflect true value, resulting in greater price efficiency. Price informativeness remains largely similar before and after, suggesting that the reduction in trading costs does not result in increased information acquisition. However, there is clear evidence of an information shift from the futures market toward the smaller-tick-size cash market. Overall, we conclude that the tick size reduction improves market quality.
    Keywords: tick size reduction; bid-ask spread; market liquidity; price efficiency; Treasury securities
    JEL: D14 G01 G12 G18
    Date: 2019–04–01
  2. By: Lee, Charles M. C. (Stanford University - Graduate School of Business); Watts, Edward M. (Stanford University, Graduate School of Business, Students)
    Abstract: This study examines how an increase in tick size affects algorithmic trading (AT), fundamental information acquisition (FIA), and the price discovery process around earnings announcements (EAs). Leveraging the SEC’s randomized “Tick Size Pilot†experiment, we show a tick size increase results in a universal decline across four commonly-used proxies for AT. This decrease in AT is accompanied by a sharp drop in abnormal volatility and volume around EAs. More importantly, we find causal evidence of increased FIA in the pre-announcement period. Specically, we show that with a larger tick size: (a) treatment firms’ pre-announcement returns better anticipate next quarter’s standardized unexpected earnings (SUEs); (b) their pre-announcement returns capture more of their total returns; (c) they experience an increase in EDGAR web trac in the days leading up to EAs; and (d) they exhibit a drop in price synchronicity with index returns. Taken together, our evidence shows that while an increase in tick size reduces AT and abnormal market reaction after EAs, it also increases FIA activities prior to EAs.
    Date: 2018–10
  3. By: Jorge Pérez-Rodríguez (Department of Quantitative Methods. University of Las Palmas de Gran Canaria, Spain.); Emilio Gómez-Déniza (Department of Quantitative Methods. TiDES Institute. University of Las Palmas de Gran Canaria, Spain.); Simón Sosvilla-Rivero (Complutense Institute for Economic Analysis, Universidad Complutense de Madrid.)
    Abstract: In this paper, we attempt to assess the potential importance of different types of traders (i.e., those with public and private information) in financial markets using a specification of the standardized duration. This approach allows us to test unobserved heterogeneity in a nonlinear version based on a self-exciting threshold autoregressive conditional duration model. We illustrate the relevance of this procedure for identifying the presence of private information in the final days of trading of Banco Popular, the first bank rescued by the European Single Resolution Board.
    Keywords: Conditional duration, threshold models, finite and infinite mixtures, private information, bank failure. JEL classification:C22, C41, D53, D82, G10, G12, G14.
    Date: 2019–04

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