Trade-throughs in European cross-traded equities after transaction costs – empirical evidence for the EURO STOXX 50

This paper investigates the accuracy and heterogeneity of output growth and inflation forecasts during the current and the four preceding NBER-dated U.S. recessions. We generate forecasts from six different models of the U.S. economy and compare them to professional forecasts from the Federal Reserve’s Greenbook and the Survey of Professional Forecasters (SPF). The model parameters and model forecasts are derived from historical data vintages so as to ensure comparability to historical forecasts by professionals. The mean model forecast comes surprisingly close to the mean SPF and Greenbook forecasts in terms of accuracy even though the models only make use of a small number of data series. Model forecasts compare particularly well to professional forecasts at a horizon of three to four quarters and during recoveries. The extent of forecast heterogeneity is similar for model and professional forecasts but varies substantially over time. Thus, forecast heterogeneity constitutes a potentially important source of economic fluctuations. While the particular reasons for diversity in professional forecasts are not observable, the diversity in model forecasts can be traced to different modeling assumptions, information sets and parameter estimates. JEL Classification: G14, G15, G2

Smart Order Routing and Best Execution

In the past decade traditional market structures have been drastically revolutionized, creating new potential for electronic trading. The driving forces are changes in trading behavior, advances in technology and new regulation. Traditional exchanges are challenged by new electronic trading platforms competing on the basis of price, cost, speed and efficiency. As trading has become more fragmented occurring in multiple venues the complexity for intelligent order routing decisions (smart order routing) will increase and extend the demand for sophisticated trading tools and efficient technology. Market fragmentation and dispersion of liquidity impose new challenges for investment firms to achieve best execution for their client orders. Against this background we examine two order execution strategies where one approach applies a pre-defined rule framework (static best execution); the alternative considers smart order routing decisions using real-time market data (dynamic best execution). We elaborate the benefits of smart order routing and outline our research approach for the validation of these findings

E-finance-lab at the House of Finance : about us

The financial services industry is believed to be on the verge of a dramatic [r]evolution. A substantial redesign of its value chains aimed at reducing costs, providing more efficient and flexible services and enabling new products and revenue streams is imminent. But there seems to be no clear migration path nor goal which can cast light on the question where the finance industry and its various players will be and should be in a decade from now. The mission of the E-Finance Lab is the development and application of research methodologies in the financial industry that promote and assess how business strategies and structures are shared and supported by strategies and structures of information systems. Important challenges include the design of smart production infrastructures, the development and evaluation of advantageous sourcing strategies and smart selling concepts to enable new revenue streams for financial service providers in the future. Overall, our goal is to contribute methods and views to the realignment of the E-Finance value chain. ..

The Impact of Dark and Visible Fragmentation on Market Quality (Replaces CentER Discussion Paper 2011-051)

Two important characteristics of current European equity markets are rooted in changes in financial regulation (the Markets in Financial Instruments Directive). The regulation (i) allows new trading venues to emerge, generating a fragmented market place and (ii) allows for a substantial fraction of trading to take place in the dark, outside publicly displayed order books. This paper evaluates the impact on liquidity of fragmentation in visible order books and dark trading for a sample of 52 Dutch stocks. We consider global liquidity by consolidating the entire limit order books of all visible European trading venues, and local liquidity by considering the traditional market only. We find that fragmentation in visible order books improves global liquidity, but dark trading has a detrimental effect. In addition, local liquidity is lowered by fragmentation in visible order books.Market microstructure;Market fragmentation;Liquidity;MiFID

Analyzing Information and Value Flows in High-Frequency Capital Markets

High-frequency trading has significant influence on today’s capital markets and has received massive attention in the media. This research aims to provide a conceptual understanding of high-frequency capital markets by analysing information and value flows between relevant high-frequency trading market participants. In a first step, market participants including traders, brokers, market platforms, technology providers, information providers, and clearing agencies are introduced. Second, the trading process is described focusing on the three most important phases, namely the information phase, order routing phase, and order matching phase. Furthermore, we review widely adopted high-frequency trading strategies such as market making, arbitrage trading, and pinging. Expert interviews are used to provide practical insights on the perception of high-frequency trading and the necessity for improved regulation. We merge theoretical knowledge and our findings from practice to develop the HFT Value Information Framework visualizing information and value flows between market participants. We discuss the interrelations between market participants in current high-frequency capital markets and describe implications for different stakeholders. Finally, the implications for regulatory bodies are discussed and possible future research opportunities are identified

The Impact of Dark and Visible Fragmentation on Market Quality (Replaces CentER Discussion Paper 2011-051)

Two important characteristics of current European equity markets are rooted in changes in financial regulation (the Markets in Financial Instruments Directive). The regulation (i) allows new trading venues to emerge, generating a fragmented market place and (ii) allows for a substantial fraction of trading to take place in the dark, outside publicly displayed order books. This paper evaluates the impact on liquidity of fragmentation in visible order books and dark trading for a sample of 52 Dutch stocks. We consider global liquidity by consolidating the entire limit order books of all visible European trading venues, and local liquidity by considering the traditional market only. We find that fragmentation in visible order books improves global liquidity, but dark trading has a detrimental effect. In addition, local liquidity is lowered by fragmentation in visible order books.