nep-mst New Economics Papers
on Market Microstructure
Issue of 2019‒07‒08
six papers chosen by
Thanos Verousis

  1. When do regulatory interventions work? By Nidhi Aggarwal; Venkatesh Panchapagesan; Susan Thomas
  2. Are cryptocurrency traders pioneers or just risk-seekers? Evidence from brokerage accounts By Matthias Pelster; Bastian Breitmayer; Tim Hasso
  3. New Informed trading in a two-tier market structure under financial distress By Claudio Impenna; Paola Paiardini
  4. Price Dynamics and Trader Overconfidence By Ahrens, Steffen; Bosch-Rosa, Ciril; Roulund, Rasmus
  5. Quasi-dark trading: The effects of banning dark pools in a world of many alternatives By Johann, Thomas; Putnins, Talis; Sagade, Satchit; Westheide, Christian
  6. Price discovery in agricultural commodity markets: Do speculators contribute? By Martin T. Bohl; Pierre L. Siklos; Martin Stefan; Claudia Wellenreuther

  1. By: Nidhi Aggarwal (Indian Institute of Management, Udaipur); Venkatesh Panchapagesan (Indian Institute of Management, Bangalore); Susan Thomas (Indira Gandhi Institute of Development Research)
    Abstract: Previous studies find mixed results about how a fee on high order-to-trade (OTR) ratios impacts market quality. Using a natural experiment where such a fee was introduced twice for different reasons, this paper finds evidence of impact only when the implementation matched the motive. We use a difference-in-difference regression, that exploits microstructure features, to find causal evidence of lower aggregate OTR and higher market quality when the fee was used to manage limited exchange infrastructure, but little to no change in the OTRs or market quality when it was used for a regulatory need to slow down high frequency trading.
    Keywords: algorithmic trading; financial regulation; market efficiency; market liquidity; financial derivatives
    JEL: G14 G18
    Date: 2019–04
  2. By: Matthias Pelster; Bastian Breitmayer; Tim Hasso
    Abstract: Are cryptocurrency traders driven by a desire to invest in a new asset class to diversify their portfolio or are they merely seeking to increase their levels of risk? To answer this question, we use individual-level brokerage data and study their behavior in stock trading around the time they engage in their first cryptocurrency trade. We find that when engaging in cryptocurrency trading investors simultaneously increase their risk-seeking behavior in stock trading as they increase their trading intensity and use of leverage. The increase in risk-seeking in stocks is particularly pronounced when volatility in cryptocurrency returns is low, suggesting that their overall behavior is driven by excitement-seeking.
    Date: 2019–06
  3. By: Claudio Impenna (Bank of Italy); Paola Paiardini (University of Birmingham)
    Abstract: The sovereign bond market has traditionally been the dominant segment of the euro area bond market and it is one of the largest in the world. Secondary market liquidity is an essential feature of a well-functioning and resilient government bond market. The secondary market of the European sovereign bonds is organised as a two-tier electronic market, with an inter-dealer and a dealer-to-customer segment. The previous literature uses a sequential trade model, to investigate the probability of informed trading (PIN) in the parallel trading of the same bond on these two venues, finding that the PIN is significantly lower in the dealer-to-customer segment than in the inter-dealer one. We contribute to the existing literature analysing this two-tier market for a longer period, which includes episodes of financial distress in the Eurozone and various ECB interventions to try to contain the crisis. We show that the crisis deeply affected the two segments of the market, reverting the conclusion about the presence of informed traders in the two platforms for some periods, and questioning the need for this trading structure and its stability.
    Keywords: Market microstructure; Informed trading; Government bonds
    JEL: G10 G12 G14
    Date: 2019–06
  4. By: Ahrens, Steffen (TU Berlin); Bosch-Rosa, Ciril (TU Berlin); Roulund, Rasmus (Danmarks Nationalbank)
    Abstract: Overconfidence is one of the most important biases in financial markets and commonly associated with excessive trading and asset market bubbles. So far, most of the finance literature takes overconfidence as a given, \"static\" personality trait. In this paper we introduce a novel experimental design which allows us to track different measures of overconfidence during an asset market bubble. The results show that overconfidence co-moves with asset prices and points towards a feedback loop in which overconfidence adds fuel to the flame of existing bubbles.
    Keywords: overconfidence; experiment; asset markets;
    JEL: C91 D84 G11
    Date: 2019–06–26
  5. By: Johann, Thomas; Putnins, Talis; Sagade, Satchit; Westheide, Christian
    Abstract: We show that "quasi-dark" trading venues, i.e., markets with somewhat non-transparent trading mechanisms, are important parts of modern equity market structure alongside lit markets and dark pools. Using the European MiFID II regulation as a quasi-natural experiment, we find that dark pool bans lead to (i) volume spill-overs into quasi-dark trading mechanisms including periodic auctions and order internalization systems; (ii) little volume returning to transparent public markets; and consequently, (iii) a negligible impact on market liquidity and short-term price efficiency. These results show that quasi-dark markets serve as close substitutes for dark pools and consequently mitigate the effectiveness of dark pool regulation. Our findings highlight the need for a broader approach to transparency regulation in modern markets that takes into consideration the many alternative forms of quasi-dark trading.
    Keywords: Dark Pools,Dark Trading,Liquidity,Price Efficiency,MiFID II,Double VolumeCaps
    JEL: G10 G19
    Date: 2019
  6. By: Martin T. Bohl; Pierre L. Siklos; Martin Stefan; Claudia Wellenreuther
    Abstract: Previous literature on price discovery in commodity markets is mainly focused on the question of whether the spot or the futures market dominates the price discovery process. Little attention, however, has been paid to the question of how the price discovery process is affected by futures speculation. Using different measures for speculation and hedging and a new price discovery metric, the present study analyzes this relationship for various agricultural commodities. On the whole, the results suggest that speculative activity reduces the level of noise in the futures markets under analysis, while increasing their relative contribution to the price discovery process.
    Keywords: Commodity Markets, Futures Speculation, Price Discovery
    JEL: G13 G14 Q02
    Date: 2019–06

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