nep-mst New Economics Papers
on Market Microstructure
Issue of 2019‒11‒18
two papers chosen by
Thanos Verousis

  1. Do "speed bumps" prevent accidents in financial markets? By Gonçalves, Jorge; Kräussl, Roman; Levin, Vladimir
  2. OTC microstructure in a period of stress: a multi‑layered network approach By Joseph, Andreas; Vasios, Michalis; Maizels, Olga; Shreyas, Ujwal; Tanner, John

  1. By: Gonçalves, Jorge; Kräussl, Roman; Levin, Vladimir
    Abstract: Is it true that speed bumps level the playing field, make financial markets more stable and reduce negative externalities of high-frequency trading (HFT) firms? We examine how the implementation of a particular speed bump - Midpoint Extended Life order (M-ELO) on Nasdaq impacted financial markets stability in terms of occurrences of mini-flash crashes in individual securities. We use high-frequency order book message data around the implementation date and apply difference-in-differences analysis to estimate the average treatment effect of the speed bump on market stability and liquidity provision. The results suggest that the introduction of the M-ELO decreases the average number of crashes on Nasdaq compared to other exchanges by 4.7%. Liquidity provision by HFT firms also improves. These findings imply that technology-based solutions by exchanges are feasible alternatives to regulatory intervention towards safer markets.
    Keywords: mini-flash crash,speed bump,midpoint extended life order
    JEL: C21 G14 G18
    Date: 2019
  2. By: Joseph, Andreas (Bank of England); Vasios, Michalis (Norges Bank Investment Management); Maizels, Olga (Bank of England); Shreyas, Ujwal (Black Rock Investment Management & Financial Services); Tanner, John (Bank of England (retired))
    Abstract: Using unique data at transaction and counterparty identity level, we study the microstructure of the Swiss franc FX over‑the‑counter (OTC) derivatives market during a time of stress that was triggered by the decision of the Swiss National Bank (SNB) to remove the Swiss franc‑euro exchange rate floor on 15 January 2015. Building on new methodology based on the topology of the trading network we segment the market into a multi‑layered structure. We observe that the SNB announcement had a clear and differentiate impact on the market from this perspective. Clients in a more central position in the network topology were able to enter the market sooner than peripheral counterparties, while the inter‑dealer core of the market was largely inactive. Using outstanding positions to proxy demand we observe that clients in greater need of trading were offered unfavourable prices if they found liquidity. Overall, our results point to a shortage of liquidity in the phase of market adjustment and highlight the heterogeneous reactions of different market segments during that time.
    Keywords: OTC derivatives markets; FX markets; market microstructure; networks; financial stability; market regulation
    JEL: C80 G14 G23 G24
    Date: 2019–10–11

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