nep-mst New Economics Papers
on Market Microstructure
Issue of 2022‒03‒28
four papers chosen by
Thanos Verousis

  1. Flash crashes on sovereign bond markets – EU evidence By Antoine Bouveret; Martin Haferkorn; Gaetano Marseglia; Onofrio Panzarino
  2. Price formation in financial markets: a game-theoretic perspective By David Evangelista; Yuri Saporito; Yuri Thamsten
  3. Inflationary Redistribution, Trading Opportunities and Consumption Inequality By Timothy Kam; Junsang Lee
  4. The Emergence of Market Structure By Maryam Farboodi; Gregor Jarosch; Robert Shimer

  1. By: Antoine Bouveret (European Securities and Markets Authority); Martin Haferkorn (European Securities and Markets Authority); Gaetano Marseglia (Bank of Italy); Onofrio Panzarino (Bank of Italy)
    Abstract: The development of electronic and automated trading in sovereign bond markets has been accompanied by a more frequent occurrence of flash crashes, i.e. episodes of sudden and abrupt price changes that are to a large extent reversed shortly afterwards. We focus our analysis on two flash events in the German and Italian bond markets and show how liquidity vanished ahead of the crashes, resulting in trades having a large price impact on prices. We document that, during the flash event of 29 May 2018, activity on Italian bonds futures and cash markets diverged: trading activity in futures surged, while it plummeted on the cash market. In addition, we show that the effects of flash events on the liquidity in the affected markets can last up to several weeks. Our findings call for increased monitoring of electronic trading markets, taking into account the pace of financial innovation, and for pursuing more integrated approaches in the presence of highly interlinked markets.
    Keywords: Market liquidity, flash crash, sovereign bonds.
    JEL: G01 G10 G12 G18
    Date: 2022–03
  2. By: David Evangelista; Yuri Saporito; Yuri Thamsten
    Abstract: We propose two novel frameworks to study the price formation of an asset negotiated in an order book. Specifically, we develop a game-theoretic model in many-person games and mean-field games, considering costs stemming from limited liquidity. We derive analytical formulas for the formed price in terms of the realized order flow. We also identify appropriate conditions that ensure the convergence of the price we find in the finite population game to that of its mean-field counterpart. We numerically assess our results with a large experiment using high-frequency data from ten stocks listed in the NASDAQ, a stock listed in B3 in Brazil, and a cryptocurrency listed in Binance.
    Date: 2022–02
  3. By: Timothy Kam; Junsang Lee
    Abstract: We study competitive search in goods markets in a heterogeneous-agent monetary model. The model accounts for three stylized facts connecting inflation to consumption inequality, to price dispersion, and to the speed of monetary payments. With competitive search, individuals’ endogenous probabilities on trading events give rise to a trading-opportunity (extensive-margin) force that works in opposite direction to well-known redistributive (intensive-margin) effect of inflation. This implies a new trade-off in response to long-run inflation targets. Welfare falls but liquid-wealth inequality falls and then rises with inflation as an extensive margin of trade dominates the redistributive intensive margin, when inflation is sufficiently high.
    Keywords: Competitive Search; Inflation; Policy Trade-offs; Redistribution; Computational Geometry
    JEL: E0 E4 E5 E6 C6
    Date: 2022–03
  4. By: Maryam Farboodi (MIT); Gregor Jarosch (Princeton University); Robert Shimer (University of Chicago)
    Abstract: What market structure emerges when market participants can choose the rate at which they contact others? We show that traders who choose a higher contact rate emerge as intermediaries, earning profits by taking asset positions that are misaligned with their preferences. Some of them, middlemen, are in constant contact with other traders and so pass on their position immediately. As search costs vanish, traders still make dispersed investments and trade occurs in intermediation chains, so the economy does not converge to a centralized market. When search costs are a differentiable function of the contact rate, the endogenous distribution of contact rates has no mass points. When the function is weakly convex, faster traders are misaligned more frequently than slower traders. When the function is linear, the contact rate distribution has a Pareto tail with parameter 2 and middlemen emerge endogenously. These features arise not only in the (inefficient) equilibrium allocation, but also in the optimal allocation. Moreover, we show that intermediation is key to the emergence of the rest of the properties of this market structure.
    Keywords: Over-the-Counter Markets, Intermediation, Middlemen, Random Matching, Endogenous Search Intensity, Network Formation, Pareto Distribution, Welfare
    JEL: E44 G12 G20
    Date: 2020–05

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