1,720,972 research outputs found
Informed Traders as Liquidity Providers: Anonymity, Liquidity and Price Formation
No full textThe tendency to introduce anonymity into financial markets apparently runs counter to the theory supporting transparency. This paper studies the impact of pre-trade transparency on liquidity in a market where risk-averse traders accommodate the liquidity demand of noise traders. When some risk-averse investors become informed, an adverse selection problem ensues for the others, making them reluctant to supply liquidity. Hence the disclosure of traders' identities improves liquidity by mitigating adverse selection. However, informed investors are effective liquidity suppliers, as their adverse selection and inventory costs are minimised. With endogenous information acquisition, transparency reduces the number of informed investors, thus decreasing liquidity. The type of information that traders hold and the effectiveness of insider trading regulation are crucial to distinguish between equilibria
Market for Information and Identity Disclosure in an Experimental Open Limit Order Book
No full textStock exchanges have recently introduced specialists to improve market quality of less traded stocks. This paper studies the effect of market making in the Italian Stock Exchange, where information disclosure requirements are imposed on specialists. The focus is on the natural experiment of STAR, a group of small-medium capitalization stocks that are assigned a specialist starting from 2001. Because liquidity requirements are not binding for the sample stocks, the analysis can concentrate on the specialists' obligations of information disclosure. The results show that specialists' activity as information providers improves market quality by reducing the bid-ask spread and price volatility. Information asymmetries, measured by the probability of informed trading (PIN), and the adverse selection component of the spread significantly decrease. An event study approach provides evidence that the information released by the specialists is perceived as useful by market participants
The Microstructure of Financial Markets
No full textThe analysis of the microstructure of financial markets has been one of the most important areas of research in finance and has allowed scholars and practitioners alike to have a much more sophisticated understanding of the dynamics of price formation in financial markets. This book provides an integrated graduate level textbook treatment of the theory and empirics of the subject, starting with a detailed description of the trading systems on stock exchanges and other markets and then turning to a discussion of the theoretical and empirical model of market miscrostructure. The material is intended for PhD and Masters (MSc or MPhil) students in economics or finance. Readers are expected to have some background in microeconomic theory, basic finance and some statistics. The aim is to provide the student with the tools to be able to read and appreciate academic papers on market microstructure
Dark pool trading strategies, market quality and welfare
No full textWe show that when a continuous dark pool is added to a limit order book that opens illiquid, book and consolidated Öll rates and volume increase, but spread widens, depth declines and welfare deteriorates. The adverse e§ects on market quality and welfare are mitigated when
book-liquidity builds but so are the positive e§ects on trading activity. All e§ects are stronger when tradersívaluations are less dispersed, access to the dark pool is greater, horizon is longer, and relative tick size larger
Undisclosed Orders and Optimal Submission Strategies in a Limit Order Market
No full textReserve orders enable traders to hide a portion of their orders and now appear in most electronic limit order markets. This article outlines a theory to determine an optimal submission strategy in a limit order book, in which traders choose among limit, market, and reserve orders while simultaneously setting price, quantity, and exposure. We show that reserve orders help traders compete for the provision of liquidity and reduce the friction generated by exposure costs. Therefore, total gains from trade increase. Large traders always bene\u85t from reserve orders, whereas small traders only bene\u85t when the tick size is large. JEL classi\u85cation: G1
Tick size, trading strategies, and market quality
No full textWe investigate the effects of a tick-size reduction on market quality in a multiperiod limit order book market. For illiquid stocks, reducing the tick size facilitates undercutting and discourages liquidity provision, resulting in deteriorating market quality but higher volume. For liquid stocks, reducing the tick size curtails queues, resulting in lower depth and volume but narrower spread. With a competing crossing network, a tick-size reduction results in worse market quality for all stocks due to migration of order flows. We empirically test our model predictions and find support for recent tick-size reductions in Japan and the United States
Market Makers as Information Providers: the Natural Experiment of STAR1
No full textMarket makers are financial intermediaries that are supposed to provide additional liquidity, but do not have any information-related obligation. This paper studies the unique case of the Italian Stock Exchange, where market makers are also obliged to facilitate information disclosure about the firms they cover. We focus on a group of small/medium capitalization stocks (STAR) that are assigned a specialist starting from 2001. We show that their liquidity requirements were not effective and that the main impact of the specialists ´ introduction was due to their information provision obligations. We find that specialists ' activity as information providers reduces the spread and price volatility, the probability of informed trading (PIN), and the adverse selection component of the spread. An event study provides evidence that the informational meetings organized by specialists are perceived as useful by market participants
Trading European sovereign bonds: the microstructure of the MTS trading platforms
No full textWe study the microstructure of the MTS Global Market bond trading system, which is the largest interdealer trading system for Eurozone government bonds. Using a unique new dataset we find that quoted and effective spreads are related to maturity and trading intensity. Securities can be traded on a domestic and EuroMTS platform. We show that despite the apparent fragmentation of trading, both platforms are closely connected in terms of liquidity. We also study the intraday price order flow relation in the Euro bond market. We estimate the price impact of order flow and control for the intraday trading intensity and the announcement of macroeconomic news. The regression results show a larger impact of order flows during announcement days and a higher price impact of trading after a longer period of inactivity. We relate these findings to interdealer trading and to the structure of European bond markets
Diving into dark pools
Get PDFWe 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
The Effect of a Closing Call Auction on Market Quality and Trading Strategies
No full textWe study the effects of the introduction of a closing auction (CA) on the microstructure on the continuous trading phase in Borsa Italiana and Paris Bourse. We postulate and compare several empirical predictions based on both standard Kyle-type models and more recent models of limit order book. We find that while the CA has no effect during most of the day, its effect on the last minutes of trading is dramatic. We document a sharp decline in volume, associated with a significant reduction in spread and volatility, and an increase in aggressiveness of liquidity suppliers during the last minutes. We show that the differences in the Reference Price algorithm between Milan and Paris have a significant effect: the CA attracts greater volumes when the Reference Price is equated to the CA price
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