nep-mst New Economics Papers
on Market Microstructure
Issue of 2022‒06‒20
four papers chosen by
Thanos Verousis

  1. Cross-Market Spoofing By Alexis Stenfors; Mehrdaad Doraghi; Cristina Soviany; Masayuki Susai; Kaveh Vakili
  2. Price and liquidity discovery in European sovereign bonds and futures By Jappelli, Ruggero; Lucke, Konrad; Pelizzon, Loriana
  3. Diving into Dark Pools By Buti, Sabrina; Rindi, Barbara; Werner, Ingrid M.
  4. Financial Intermediaries and the Macroeconomy: Evidence from a High-Frequency Identification By Pablo Ottonello; Wenting Song

  1. By: Alexis Stenfors (University of Portsmouth); Mehrdaad Doraghi (Features Analytics); Cristina Soviany (Features Analytics); Masayuki Susai (Shiga University); Kaveh Vakili (Features Analytics)
    Abstract: Since 2013, regulatory investigations have revealed widespread manipulation and collusive practices among banks active in over-the-counter (OTC) markets. These discoveries have resulted in fines and settlements amounting to billions of US dollars, criminal proceedings and stricter regulation worldwide. However, recent legal cases and regulatory reports indicate that authorities have stepped up their efforts to crack down on so-called “cross-market spoofing”. The manipulative tactic involves a combination of a genuine order in one market and a spoof order in another, which is notoriously difficult to detect. In this paper, we use a high-frequency data set of limit order book snapshots from the foreign exchange (FX) spot market to develop and test a methodology to assess the feasibility, and hence potential prevalence, of cross-market spoofing. Our findings show that predictable reactions follow potential single-market spoofs that a market manipulator may exploit. However, we also find that predictability may be observed in closely related markets. In particular, we discover that EUR/JPY offers a reliable pathway for a manipulator to exploit via spoof orders at deeper levels in the EUR/USD or USD/JPY limit order books. Overall, our pilot study lends support to the increasing attention to cross-market manipulation by compliance officers and financial regulators.
    Keywords: foreign exchange; limit order book; manipulation; market microstructure; spoofing; trading
    JEL: D4 F31 G1
    Date: 2022–06–13
  2. By: Jappelli, Ruggero; Lucke, Konrad; Pelizzon, Loriana
    Abstract: This work uses financial markets connected by arbitrage relations to investigate the dynamics of price and liquidity discovery, which refer to the cross-instrument forecasting power for prices and liquidity, respectively. Specifically, we seek to understand the linkage between the cheapest to deliver bond and closest futures pairs by using high-frequency data on European governments obligations and derivatives. We split the 2019-2021 sample into three subperiods to appreciate changes in the liquidity discovery induced by the COVID-19 pandemic. Within a cointegration model, we find that price discovery occurs on the futures market, and document strong empirical support for liquidity spillovers both from the futures to the cash market as well as from the cash to the futures market.
    Keywords: Fixed Income,Limits to Arbitrage,Market Liquidity
    JEL: G12 G13 G15
    Date: 2022
  3. By: Buti, Sabrina (Université Paris Dauphine); Rindi, Barbara (Bocconi University and IGIER and Baffi Carefin); Werner, Ingrid M. (Ohio State University - Fisher College of Business)
    Abstract: We study 2009 and 2020 dark trading for U.S. stocks. Dark trading is lower when volume is low, volatility high, and in periods of markets stress. Dark pools are more active for large caps, while internalization is more common for small caps. Traders use dark pools to jump the queue for large caps in 2009, and to avoid crossing the spread for small caps in both years. Internalization is higher when spreads are wide and depth is high. Dark pool trading improves spreads in 2009, but worsens market quality for large caps in 2020. We discuss explanations for the change.
    JEL: G10 G12 G14 G18 G20
    Date: 2022–02
  4. By: Pablo Ottonello; Wenting Song
    Abstract: We provide empirical evidence of the causal effects of changes in financial intermediaries’ net worth on the aggregate economy. Our strategy identifies financial shocks as high-frequency changes in the market value of intermediaries’ net worth in a narrow window around their earnings announcements, based on US tick-by-tick data. Using these shocks, we estimate that news of a 1% decline in intermediaries’ net worth leads to a 0.2% to 0.4% decrease in the market value of nonfinancial firms. These effects are more pronounced for firms with high default risk and low liquidity and when the aggregate net worth of intermediaries is low.
    Keywords: Asset pricing; Business fluctuations and cycles; Credit and credit aggregates; Financial institutions; Financial markets; Financial system regulation and policies; Monetary and financial indicators
    Date: 2022–05

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