nep-mst New Economics Papers
on Market Microstructure
Issue of 2020‒05‒18
six papers chosen by
Thanos Verousis

  1. Price Manipulation, Dynamic Informed Trading, and the Uniqueness of Equilibrium in Sequential Trading By Shino Takayama
  2. The What, When and Where of Limit Order Books By Johannes Bleher; Michael Bleher; Thomas Dimpfl
  3. What Keeps Stablecoins Stable? By Richard K. Lyons; Ganesh Viswanath-Natraj
  4. Generalization of Affine Feedback Stock Trading Results to Include Stop-Loss Orders By Chung-Han Hsieh
  5. Information Flow and Price Discovery Dynamics By Lei Wu; Kuan Xu; Qingbin Meng
  6. Elaboration of proposals for the development of electronic trading platforms in the digital economy of Russia By Levashenko, Antonina (Левашенко, Антонина); Girich, Maria (Гирич, Мария)

  1. By: Shino Takayama (School of Economics, University of Queensland)
    Abstract: We study the manipulation of prices in a dynamic version of the Glosten and Milgrom (1985) model with a long-lived informed trader. The conditions under which a unique equilibrium exists are clarified. We show that within the unique equilibrium, bid and ask prices are monotonically increasing functions of the market maker’s belief, and we characterize the situations in which this equilibrium involves manipulation of prices by the informed trader. Finally, we describe a computational method to find equilibria in the model, and give simulation results that confirm and extend our theoretical findings.
    Keywords: Market microstructure; Glosten–Milgrom; Insider trading; Dynamic trading; Price formation; Sequential trade; Asymmetric information; Bid–ask spreads.
    JEL: D82 G12
    Date: 2020–05–05
  2. By: Johannes Bleher; Michael Bleher; Thomas Dimpfl
    Abstract: We model the limit order book (LOB) as a continuous Markov process and develop an algebra to describe its dynamics based on the fundamental events of the book: order arrivals and cancellations. We show how all observables (prices, returns, and liquidity measures) are governed by the same variables which also drive arrival and cancellation rates. The sensitivity of our model is evaluated in a simulation study and an empirical analysis. We estimate several linearized model specifications based on the theoretical description of the LOB and conduct in- and out-of-sample forecasts on several frequencies. The in-sample results based on contemporaneous information suggest that our model describes up to 90% of the variation of close-to-close returns, the adjusted $R^2$ still ranges at around 80%. In the more realistic setting where only past information enters the model, we still observe an adjusted $R^2$ in the range of 15%. The direction of the next return can be predicted, out-of-sample, with an accuracy of over 75% for short time horizons below 10 minutes. Out-of-sample, on average, we obtain $R^2$ values for the Mincer-Zarnowitz regression of around 2-3% and an $RMSPE$ that is 10 times lower than values documented in the literature.
    Date: 2020–04
  3. By: Richard K. Lyons; Ganesh Viswanath-Natraj
    Abstract: We take this question to be isomorphic to, "What Keeps Fixed Exchange Rates Fixed?" and address it with analysis familiar in exchange-rate economics. Stablecoins solve the volatility problem by pegging to a national currency, typically the US dollar, and are used as vehicles for exchanging national currencies into non-stable cryptocurrencies, with some stablecoins having a ratio of trading volume to outstanding supply exceeding one daily. Using a rich dataset of signed trades and order books on multiple exchanges, we examine how peg-sustaining arbitrage stabilizes the price of the largest stablecoin, Tether. We find that stablecoin issuance, the closest analogue to central-bank intervention, plays only a limited role in stabilization, pointing instead to stabilizing forces on the demand side. Following Tether's introduction to the Ethereum blockchain in 2019, we find increased investor access to arbitrage trades, and a decline in arbitrage spreads from 70 to 30 basis points. We also pin down which fundamentals drive the two-sided distribution of peg-price deviations: Premiums are due to stablecoins' role as a safe haven, exhibiting, for example, premiums greater than 100 basis points during the COVID-19 crisis of March 2020; discounts derive from liquidity effects and collateral concerns.
    JEL: E02 E4 E5 F3 F4 G12 G14 G15 G2 O16 O33
    Date: 2020–05
  4. By: Chung-Han Hsieh
    Abstract: The takeoff point of this paper is to generalize the existing stock trading results for a class of affine feedback controller to include consideration of a stop-loss order. Using the geometric Brownian motion as the underlying stock price model, our main result is to provide a closed-form expression for the cumulative distribution function for the trading profit or loss. In addition, we show that the affine feedback controller with stop-loss order indeed generalizes the result without stop order in the sense of distribution function. Some simulations and illustrative examples are also provided as supporting evidence of the theory. Moreover, we provide some technical results aimed at addressing the issues about survivability, cash-financing considerations, long-only property, and lower bound of the expected gain or loss.
    Date: 2020–04
  5. By: Lei Wu (School of Economics and Management, Beihang University); Kuan Xu (Department of Economics, Dalhousie University); Qingbin Meng (School of Business, Renmin University of China)
    Date: 2020–05–07
  6. By: Levashenko, Antonina (Левашенко, Антонина) (The Russian Presidential Academy of National Economy and Public Administration); Girich, Maria (Гирич, Мария) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: In the framework of this work, aspects of the legal regulation of electronic trading platforms were analyzed, in particular, regulatory standards within the framework of international organizations, including the OECD, WTO, UNCITRAL, WIPO, the Council of Europe, as well as standards in countries with the largest volume of electronic commerce, including the USA, China , India, EU countries (France, Germany), Australia. The result of the work was the formation of proposals for regulating the operation of electronic trading floors in Russia, including registration and reporting, defining the boundaries of responsibility of electronic trading floors, taxation, protecting consumers' rights, protecting personal data, currency control, customs regulation, regulating advertising and spam, protecting intellectual property, antitrust regulation, financial and information support measures, currency regulation, etc.
    Keywords: e-commerce, electronic trading platforms, OECD, consumer protection, personal data protection, taxation, advertising and spam, competition
    Date: 2020–03

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