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on Market Microstructure |
| By: | Yi Ding (Faculty of Business Administration, University of Macau); Songze Shi (Faculty of Business Administration, University of Macau) |
| Abstract: | We study systematic trading activities at ultra-high frequencies and their implications for price formation. A continuous-time, high-dimensional factor model is proposed for stock trading volume. This model features a Common Trading Intensity (CTI) factor that captures common trading flow. We develop estimation and inference theories for studying the fine dynamics of CTI. Using trading volume data from U.S. equities, we find strong negative temporal dependence in short-horizon CTI movements, pointing to the presence of intraday systematic liquidity frictions. Moreover, large negative CTI shocks are followed by brief intraday price adjustments that unwind rapidly, suggesting e!cient intraday systematic liquidity rebalancing. |
| Keywords: | trading volume, common trading intensity, volatility, high-frequency data, factor model, price formation |
| JEL: | C32 C38 C55 C58 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:boa:wpaper:202641 |
| By: | Wenpin Tang |
| Abstract: | We consider the interaction between centralized trading and decentralized Proof of Stake (PoS) blockchain ecosystems. Motivated by the increasing dominance of centralized exchanges and the institutionalization of crypto markets, we study how trading activities on centralized exchanges affect staking behavior, token allocation, and decentralization within a PoS blockchain. We formulate a continuous-time mean field model, where the miners simultaneously act as validators in the PoS protocol and traders in a centralized market with price impact. Under suitable assumptions, we establish the local well-posedness of the mean field system, and derive a semi-explicit characterization of the equilibrium trading strategy. Numerical results suggest that centralized trading activities may enhance staking participation, and promote decentralization of the staking distribution through market incentives. We also study the effects of transaction costs and token supply mechanisms on the equilibrium staking ratio and concentration profile. These results illustrate how market microstructure and centralized liquidity provision can exert significant influence on decentralized blockchain protocols. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2606.09003 |
| By: | Chris Angstmann; Tim Gebbie |
| Abstract: | We give a unified analytic account of correlation emergence and the Epps effect in two coupled limit order books. The model starts from a discrete random-walk description of order flow with creation, cancellation and diffusion. A pair-trader coupling between the books is introduced at the level of order creation. We clarify how the discrete model reduces to coupled reaction--diffusion equations with a moving reaction boundary defining the transaction price. Using a regularised local-response representation of the coupling, we derive approximate closed-form expressions for realised correlations as a function of aggregation time. Here the Epps effect is shown to arise from three distinct mechanisms: asynchronous event clocks (subordination), finite coupling response times, and their combination. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2606.14182 |
| By: | Fenghui Yu |
| Abstract: | This paper develops a unified explicit solution theory for optimal execution through sequential limit-order placement in a limit order book. Rather than controlling only the trading speed of a metaorder, we determine how individual limit orders should be quoted over time. The model incorporates signal-dependent drift, price impact, inventory risk, and execution risk, with fills modeled by point processes whose intensities depend on the submitted quotes. We formulate four execution criteria: expected terminal wealth, expected terminal wealth with running inventory penalty, CARA utility of terminal wealth, and CARA utility with running inventory penalty. For general price-impact and inventory-penalty functions, we derive the corresponding HJB equations and show that all four problems reduce to a triangular finite-dimensional structure which can be solved explicitly, leading to fully explicit value functions and optimal quotes across all cases. We also prove well-posedness, admissibility, and verification results. The explicit formulas reveal connections between quoting strategies under different criteria, support long-horizon asymptotic analysis, and show numerically that signal-dependent drift can substantially affect optimal execution. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.24242 |
| By: | Yuki Nakamura |
| Abstract: | We extend the closed-form privacy-subsidy result of Nakamura~(2026, arXiv:2605.15746) from the single-period Kyle model to continuous-time. A committed Bayesian automated market maker observes the aggregate order flow perturbed by an independent Brownian privacy channel of diffusion intensity $\sigma_\varepsilon$. Under the Markovian linear equilibrium, the price-impact coefficient is $\lambda = \sigma_v / \sqrt{\sigma_u^2 + \sigma_\varepsilon^2}$ -- constant in time -- and the cumulative expected transfer from the protocol's liquidity pool to traders over $[0, 1]$ is $|\Pi_M| = \sigma_v \sigma_\varepsilon^2 / \sqrt{\sigma_u^2 + \sigma_\varepsilon^2}$. We then establish a structural duality between this cumulative privacy subsidy and Loss-Versus-Rebalancing (Milionis et al.~2022), identifying privacy-noise welfare as the order-flow observation analog of LVR's price observation gap. The result completes the program of quantifying break-even fees for committed-AMM exchanges under privacy-aggregated information environments. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.25631 |
| By: | Frank M. V. Feys |
| Abstract: | This paper axiomatizes the bid-ask market maker's quoting rule. A quoting rule maps the maker's state, namely inventory, belief, variance, trade intensity, and informed-trader fraction, to a bid-ask pair. Eight natural axioms, together with six environmental assumptions on the maker's inventory cost, force a unique three-parameter family: the mid-quote is linear in inventory, and the spread decomposes additively into inventory and adverse-selection components. Each of the three parameters is identified from a distinct moment of the observable quoting rule, with the three identifications mutually decoupled. The eight axioms partition into a four-axiom indispensable core, one structural choice, and three modularity extensions. Two structural corollaries follow: the latent inventory cost function is recoverable from the limit order book, and a sharp phase transition separates a functioning regime from a frozen one. A closing meta-theorem identifies four features invariant across all admissible structural primitives within the axiom system. To our knowledge, this is the first forced-uniqueness axiomatization of the quoting rule. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2606.09454 |
| By: | Liang Chen; Tse-Chun Lin; Fei Wu; Xingjian Zheng; Eric Zou |
| Abstract: | The emergence of wearable electroencephalography (EEG) technologies presents new opportunities to identify and quantify neural correlates of decision-making in real-time, financially consequential settings. We report a field study in which we use wearable EEG devices to record brainwave activity from professional day traders during real-world, high-stakes trading. Using these signals, we construct an established psychophysiological Engagement Index (EI), which is defined as beta wave power divided by the sum of alpha and theta wave power, and document clear spike-and-decay patterns around trade execution. Linking EI dynamics to trading performance, we find that more successful trades are preceded by larger EI spikes in the 30 seconds before execution, while baseline or background EI levels have no predictive power and, if anything, are negatively associated with performance. We further show that higher EI is associated with attenuated behavioral biases in trading, including the round number heuristic and the disposition effect. |
| JEL: | C80 C89 D91 G11 G41 J24 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35345 |
| By: | Patrick Allmis; Paolo Pin; Fernando Vega Redondo |
| Abstract: | We build upon a simple micro-founded model of asset trading proposed by Kyle (1985) to study under what conditions a trader who is privately informed of the future return of the asset may want to share her information with other traders. Despite what conventional wisdom suggests, we show that in the unique equilibrium of the game the informed trader reveals her information with positive probability. A consequence of it is that, in contrast with the corresponding no-communication benchmark, the equilibrium price need not be fully revealing of the asset's return, even if traders are risk neutral. This, in turn, has significant implications on the distribution of the social surplus. While our model initially assumes that inter-agent communication is restricted by an arbitrarily given social network, we also study which such networks arise when links are endogenously formed through traders' prior connection decisions. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2606.11053 |