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on Market Microstructure |
| By: | Xue-Zhong He (Finance Discipline Group, UTS Business School, University of Technology Sydney); Junqing Kang; Xuan Zhou |
| Abstract: | This paper examines how technological innovations drive fast trading investment for both speculators and exchanges and their impact on market. The negative externality of the speed acquisition from fast speculators can result in excessive investment, which is intensified as speculators’ speed technology advances. As exchange’s speed technology advances, faster exchange makes faster speculators more concentrated; that is, higher exchange speed shrinks market fraction of fast speculators but stimulates their optimal trading speed. As the result, market liquidity is improved but price discovery is reduced. Policy makers aiming to balance price discovery and deadweight loss from costly speed investment may lead to a mismatch between the desired exchange speed for policy makers and the optimal speed supplied by exchange, echoing the concerns of market regulations about market failure on speed arms race. |
| Keywords: | Exchange latency; high-frequency trading; speed hierarchy |
| JEL: | G12 G14 G18 D41 D44 D47 D82 D83 D84 |
| Date: | 2020–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:419&r=all |
| By: | Harald Hau; Peter Hoffmann; Sam Langfield; Yannick Timmer |
| Abstract: | New regulatory data reveal extensive price discrimination against non-financial clients in the FX derivatives market. The client at the 90th percentile pays an effective spread of 0.5%, while the bottom quarter incur transaction costs of less than 0.02%. Consistent with models of search frictions in over-the-counter markets, dealers charge higher spreads to less sophisticated clients. However, price discrimination is eliminated when clients trade through multi-dealer request-for-quote platforms. We also document that dealers extract rents from captive clients and market opacity, but only for contracts negotiated bilaterally with unsophisticated clients. |
| Keywords: | Over-the-counter markets;Public investment and public-private partnerships (PPP);Currency markets;Price adjustments;Securities markets;WP,client sophistication,forward rate,dealer-client relationship,FX market,market structure |
| Date: | 2019–05–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/100&r=all |
| By: | Jean-Pierre Fouque; Sebastian Jaimungal; Yuri F. Saporito |
| Abstract: | Trading frictions are stochastic. They are, moreover, in many instances fast-mean reverting. Here, we study how to optimally trade in a market with stochastic price impact and study approximations to the resulting optimal control problem using singular perturbation methods. We prove, by constructing sub- and super-solutions, that the approximations are accurate to the specified order. Finally, we perform some numerical experiments to illustrate the effect that stochastic trading frictions have on optimal trading. |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2101.10053&r=all |
| By: | Bary S.R. Pradelski; Jacob Leshno; Bary Pradelski (POLARIS - Performance analysis and optimization of LARge Infrastructures and Systems - LIG - Laboratoire d'Informatique de Grenoble - UJF - Université Joseph Fourier - Grenoble 1 - UPMF - Université Pierre Mendès France - Grenoble 2 - CNRS - Centre National de la Recherche Scientifique - INPG - Institut National Polytechnique de Grenoble - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - Inria Grenoble - Rhône-Alpes - Inria - Institut National de Recherche en Informatique et en Automatique) |
| Abstract: | We study the dynamics of price discovery in decentralized two-sided markets. We show that there exist memoryless dynamics that converge to the core of the underlying assignment game in which agents' actions depend only on their current payoff. However, we show that for any such dynamic the convergence time can grow exponentially in relation to the population size. We present a natural dynamic in which a player's reservation value provides a summary of his past information and show that this dynamic converges to the core in polynomial time in homogeneous markets. |
| Keywords: | assignment game,price discovery,information,convergence time |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03100097&r=all |