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on Market Microstructure |
| By: | Yichi Zhang; Mihai Cucuringu; Alexander Y. Shestopaloff; Stefan Zohren |
| Abstract: | In the rapidly evolving world of financial markets, understanding the dynamics of limit order book (LOB) is crucial for unraveling market microstructure and participant behavior. We introduce ClusterLOB as a method to cluster individual market events in a stream of market-by-order (MBO) data into different groups. To do so, each market event is augmented with six time-dependent features. By applying the K-means++ clustering algorithm to the resulting order features, we are then able to assign each new order to one of three distinct clusters, which we identify as directional, opportunistic, and market-making participants, each capturing unique trading behaviors. Our experimental results are performed on one year of MBO data containing small-tick, medium-tick, and large-tick stocks from NASDAQ. To validate the usefulness of our clustering, we compute order flow imbalances across each cluster within 30-minute buckets during the trading day. We treat each cluster's imbalance as a signal that provides insights into trading strategies and participants' responses to varying market conditions. To assess the effectiveness of these signals, we identify the trading strategy with the highest Sharpe ratio in the training dataset, and demonstrate that its performance in the test dataset is superior to benchmark trading strategies that do not incorporate clustering. We also evaluate trading strategies based on order flow imbalance decompositions across different market event types, including add, cancel, and trade events, to assess their robustness in various market conditions. This work establishes a robust framework for clustering market participant behavior, which helps us to better understand market microstructure, and inform the development of more effective predictive trading signals with practical applications in algorithmic trading and quantitative finance. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.20349 |
| By: | \'Alvaro Cartea; Leandro S\'anchez-Betancourt |
| Abstract: | We model the trading activity between a broker and her clients (informed and uninformed traders) as an infinite-horizon stochastic control problem. We derive the broker's optimal dealing strategy in closed form and use this to introduce an algorithm that bypasses the need to calibrate individual parameters, so the dealing strategy can be executed in real-world trading environments. Finally, we characterise the discount in the price of liquidity a broker offers clients. The discount strikes the optimal balance between maximising the order flow from the broker's clients and minimising adverse selection losses to the informed traders. |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2503.18005 |
| By: | Roberto Perli |
| Abstract: | Remarks at the 8th Short-Term Funding Markets Conference, Federal Reserve Board, Washington, DC. |
| Keywords: | Treasury Market; Treasury market liquidity; funding liquidity |
| Date: | 2025–05–09 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsp:99972 |
| By: | Stephen P. Ferris (Ryan College of Business, University of North Texas, United States); Jan Hanousek, Jr. (Faculty of Business and Economics, Mendel University in Brno, Czech Republic); Jan Hanousek (Fogelman College of Business Economics, University of Memphis, United States); Jolana Stejskalová (Faculty of Business and Economics, Mendel University in Brno, Czech Republic) |
| Abstract: | Using a natural experiment based on technical improvements to Google Trends data, we are able to identify the attention of unsophisticated retail investors more clearly and disentangle its impact on equity trading. We find that this trading has a significant negative effect on a firm’s implied cost of capital. Further, we discover that the attention of unsophisticated investors decreases liquidity. These adverse effects of trading by unsophisticated investors are more pronounced for smaller firms with lower institutional ownership. As a remedy, firms respond to the increased trading of unsophisticated investors by reducing the textual complexity of their financial statements. |
| Keywords: | retail investors, investor attention, cost of capital, trading, sophistication, earnings complexity |
| JEL: | G12 G14 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:men:wpaper:105_2025 |