nep-mst New Economics Papers
on Market Microstructure
Issue of 2022‒04‒25
two papers chosen by
Thanos Verousis

  1. Heterogeneous criticality in high frequency finance: a phase transition in flash crashes By Turiel, Jeremy D.; Aste, Tomaso
  2. Information flows and the law of one price By Rui Fan; Oleksandr Talavera; Vu Tran

  1. By: Turiel, Jeremy D.; Aste, Tomaso
    Abstract: Flash crashes in financial markets have become increasingly important, attracting attention from financial regulators, market makers as well as from the media and the broader audience. Systemic risk and the propagation of shocks in financial markets is also a topic of great relevance that has attracted increasing attention in recent years. In the present work, we bridge the gap between these two topics with an in-depth investigation of the systemic risk structure of co-crashes in high frequency trading. We find that large co-crashes are systemic in their nature and differ from small ones. We demonstrate that there is a phase transition between co-crashes of small and large sizes, where the former involves mostly illiquid stocks, while large and liquid stocks are the most represented and central in the latter. This suggests that systemic effects and shock propagation might be triggered by simultaneous withdrawals or movement of liquidity by HFTs, arbitrageurs and market makers with cross-asset exposures.
    Keywords: criticality; financial networks; flash crash; high frequency trading; market microstructure; phase transition; systemic risk; EP/L015129/1; (EP/P031730/1) and EC (H2020-ICT-2018-2 825215).; ES/K002309/1
    JEL: F3 G3
    Date: 2022–02–10
  2. By: Rui Fan (Swansea University); Oleksandr Talavera (University of Birmingham); Vu Tran (University of Reading)
    Abstract: This paper explores the role of information flows for the law of one price in an almost frictionless environment. Specifically, we examine whether the volume and content of social media messages are related to the exchange rate pass-through to prices of dual-listed stocks. Our sample includes 37 million Twitter messages mentioning the name of a UK-US cross-listed stock from 2015 to 2018. Using a high-frequency intraday data sample, we observe a negative (positive) link of volume (agreement). The findings suggest that large information flows and a high degree of disagreement add extra frictions for the law of one price. In addition, there is an asymmetric pattern of the pass-through, notwithstanding that there are no import/export or geographically-related frictions. This presents further evidence for the importance of information flows in understanding the law of one price.
    Keywords: Twitter, investor sentiment, exchange rate pass-through, dual-listing, market integration, text classification, computational linguistics
    JEL: G12 G14 L86
    Date: 2022–03

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