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on Market Microstructure |
| By: | Lukas-Benedikt Fiechtner; Jose Blanchet |
| Abstract: | We study strategic trading around index reconstitution in a continuous-time, multiasset game with transient cross-asset price impact and heterogeneous beliefs about future index membership. Opportunistic traders position before a public announcement, adjust to the revealed composition, and trade around an indexer following a prescribed execution schedule. Under a no-price-manipulation condition, we construct a subgame-perfect Nash equilibrium on every finite horizon. The affine feedback policies are computed from a non-standard matrix Riccati equation and linear ordinary differential equations whose number and dimensions do not grow with the number of traders. Aggregate inventories and price impact depend on beliefs only through the population-average belief, while differences in beliefs affect individual inventory positions. Under mean-field scaling, we construct a mean-field equilibrium and obtain quantitative convergence and approximate-Nash bounds. Numerical illustrations show how competition and impact decay determine the balance between adverse price displacement from anticipatory trading and savings in the indexer's execution costs when opportunists trade against its orders during implementation. |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2609.15901 |
| By: | Yuki Nakamura |
| Abstract: | Privacy-preserving exchange designs price on a coarsened view of order flow. We show that a market maker committed to informationally efficient (posterior-mean) pricing on a signal strictly coarser than the flow it settles necessarily cedes a closed-form welfare transfer to traders -- the privacy subsidy -- and that no rule restricted to the coarse signal is simultaneously efficient and zero-profit against the settled flow. We establish this impossibility for a general coarsening, then characterise the subsidy in closed form across three canonical microstructure models: single-period Kyle with Gaussian flow noise, Glosten-Milgrom with a binary direction channel, and continuous-time Kyle-Back with a Brownian channel. The subsidy obeys a structural correspondence with Loss-Versus-Rebalancing, both welfare rates factorising as a squared noise driver times a committed-object factor. Gross of fees the subsidy is a pure transfer recovered by a break-even fee; once levied, that fee distorts volume, and the resulting deadweight -- under an explicit allocative value of trade -- is fourth-order in the noise scale while the gross subsidy is second-order, so privacy is welfare-neutral to leading order with a strictly smaller irrecoverable loss. Endogenising the privacy level, a protocol trading a differential-privacy benefit against this deadweight chooses an interior noise scale in closed form; doing so leaves the half-revealing product of price impact and informed intensity intact while unpinning the volatility-elasticity of price impact from its textbook value of one. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2609.10543 |
| By: | Riya Danait; Yuliana Zamora; Ioana Boier |
| Abstract: | Price-level limit order book (L2) data reveal aggregate liquidity but not the ordered queue required by price--time priority. Passive-execution backtests can therefore depend on an unobserved cancellation-allocation rule even when observed prices, quantities, and trades are held fixed. We frame recovery of market-by-order histories from aggregate snapshots as a conditional partial identification problem: multiple histories can reproduce the same aggregate path. Holding that path, reconciled market removals, latent order partitions, and additions fixed, our path-preserving compiler varies only cancellation allocation among front, quantity-weighted-random, and back rules. Within this compiler class, we establish front--back fill ordering for a virtual tagged order during one touch-price spell. We study seven months of synchronized 2025 Tokyo Stock Exchange data for two instruments with different trading activity: RIC 1301.T and RIC 7911.T. Ten-level L2 snapshots provide book states, while L1 trades permit inference of market removals and resting side through reconciliation. Each instrument contributes 1, 080 matched five-minute episodes over the same 18 held-out trading days. The aggressive benchmark is invariant across FIFO realizations, but passive execution is sensitive to the cancellation rule. For 1301.T, front rather than back cancellation raises preterminal completion by 8.01 percentage points and reduces implementation shortfall by 1.010 bps. For 7911.T, the corresponding differences are 7.39 percentage points and 0.384 bps. Thus, observationally equivalent aggregate-book paths can imply economically different passive-execution outcomes. Execution policies evaluated from aggregate data should be accompanied by FIFO sensitivity analysis rather than reported as single-point estimates based on an unobservable queue assumption. |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2609.13597 |
| By: | Ayca Kaya (University of Vienna); Santanu Roy (Southern Methodist University) |
| Abstract: | In a lemons market with repeated trading by sellers with persistent private information, price transparency affects gains from trade and the market's ability to learn the seller's type. With price transparency, a class of complete-learning equilibria approaches the upper bound on gains from trade imposed by private information when the seller is patient. Without price transparency, prior work shows that complete learning is impossible and gains from trade cannot reach this bound. Price transparency changes incentives by inducing sellers to reject profitable but lower-than-expected offers to preserve future rents, allowing high quality to trade slowly without distorting low quality's trade. |
| Keywords: | Repeated sales, adverse selection, lemons market, price transparency. |
| JEL: | D82 C73 D61 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:smu:ecowpa:2601 |
| By: | Vincent Meh; Jabir Sandhu; Andreas Uthemann |
| Abstract: | We examine whether hedge funds and other asset managers contributed to illiquidity in the Government of Canada bond market at the onset of the war in the Middle East in early 2026. We find no evidence that they did. Hedge funds remained active participants in primary auctions, while the extent to which dealers could offset client transactions in secondary markets stayed within its typical range. Although hedge funds did reduce leveraged positions, their trading remained broadly consistent with their usual relative-value strategies. |
| Keywords: | Financial markets and funds management; Funds management; Market functioning |
| JEL: | G G0 G01 G1 G12 G14 G2 G23 G24 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-42 |
| By: | Christopher Angstmann; Tim Gebbie |
| Abstract: | We consider two canonical market-microstructure regularities: the long-memory of trade signs and the square-root law of meta-order impact. The point is not to propose new empirical laws, but to separate the clocks on which existing laws are defined. The sign-memory law is an event-time statement about the ordering and fragmentation of hidden orders. The square-root impact law is an operational-time statement about front motion in a locally linear latent order book. Starting from a discrete-time random-walk bid/ask reaction--diffusion order book with a separate event clock, we identify an event-time imbalance reduction, derive the operational-time front and impact equations in the locally linear regime, and then subordinate both sign and impact observables to calendar time. Fractional or tempered clock effects enter through this event-to-calendar projection, not through a different operational-time impact mechanism. This gives a compact clock-aware framework in which event-time sign persistence, operational-time square-root impact, and anomalous calendar-time effects appear as distinct but compatible consequences of a common order-book representation. |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2609.13715 |