nep-mst New Economics Papers
on Market Microstructure
Issue of 2021‒04‒26
four papers chosen by
Thanos Verousis

  1. Foreign exchange markets: price response and spread impact By Juan Camilo Henao Londono; Thomas Guhr
  2. The Netting Efficiencies of Marketwide Central Clearing By Michael J. Fleming; Frank M. Keane
  3. New axioms for top trading cycles By Siwei Chen; Yajing Chen; Chia-Ling Hsu
  4. Squeezing Shorts Through Social News Platforms By Angel Tengulov; Franklin Allen; Eric Nowak; Matteo Pirovano

  1. By: Juan Camilo Henao Londono; Thomas Guhr
    Abstract: In spite of the considerable interest, a thorough statistical analysis of foreign exchange markets was hampered by limited access to data. This changed, and nowadays such data analyses are possible down to the level of ticks and over long time scales. We analyze price response functions in the foreign exchange market for different years and different time scales. Such response functions provide quantitative information on the deviation from Markovian behavior. The price response functions show an increase to a maximum followed by a slow decrease as the time lag grows, in trade time scale and in physical time scale, for all analyzed years. Furthermore, we use a price increment point (pip) spread definition to group different foreign exchange pairs and analyze the impact of the spread in the price response functions. We found that large pip spreads have stronger impact on the response. This is similar to what has been found in stock markets.
    Date: 2021–04
  2. By: Michael J. Fleming; Frank M. Keane
    Abstract: Market disruptions in response to the COVID pandemic spurred calls for the consideration of marketwide central clearing of Treasury securities, which might better enable dealers to intermediate large customer trading flows. We assess the netting efficiencies of increased central clearing using nonpublic Treasury TRACE transactions data. We find that central clearing of all outright trades would have lowered dealers’ daily gross settlement obligations by roughly $330 billion (60 percent) in the weeks preceding and following the market disruptions of March 2020, but nearly $800 billion (70 percent) when trading was at its highest. We also find that expanded central clearing would have substantially lowered settlement fails. The estimated benefits would likely be greater if dealers’ auction purchases were included in the analysis or if the increased central clearing included repo transactions.
    Keywords: Treasury securities; central clearing; dealers; market structure; COVID-19
    JEL: G28 G18 G12
    Date: 2021–04–01
  3. By: Siwei Chen; Yajing Chen; Chia-Ling Hsu
    Abstract: School choice is of great importance both in theory and practice. This paper studies the (student-optimal) top trading cycles mechanism (TTCM) in an axiomatic way. We introduce two new axioms: MBG (mutual best group)-quota-rationality and MBG-robust efficiency. While stability implies MBG-quota-rationality, MBG-robust efficiency is weaker than robust efficiency, which is stronger than the combination of efficiency and group strategy-proofness. The TTCM is characterized by MBG-quota-rationality and MBG-robust efficiency. Our results construct a new basis to compare the TTCM with the other school choice mechanisms, especially the student-optimal stable mechanism under Ergin but not Kesten-acyclic priority structures.
    Date: 2021–04
  4. By: Angel Tengulov (Vanderbilt University - Finance); Franklin Allen (Imperial College London); Eric Nowak (Swiss Finance Institute; University of Lugano); Matteo Pirovano (Universita della Svizzera italiana (USI Lugano); Swiss Finance Institute)
    Abstract: At the end of January 2021, a group of stocks listed on US stock exchanges experienced sudden surges in their stock prices, which - coupled with high short interest – led to brief short squeeze episodes. We argue that these short squeezes were the result of coordinated trading by investors, who discussed their trading strategies on social news platforms. In addition, option markets played a central role in these events. Using hand-collected data we provide the first rigorous academic study of these short-squeezes and show that they significantly impeded market quality not only of the stocks at issue but also of their competitors. This evidence calls for tighter monitoring of social news platforms and a better understanding of the interlinkages between these platforms, derivatives markets and equity markets.
    Keywords: Limits to arbitrage; Short selling; Short squeeze; Gamma squeeze; Social news platforms
    JEL: G10 G12 G13 G14 G18
    Date: 2021–04

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