Internalization, Clearing and Settlement, and Liquidity

Abstract: We study the relation between liquidity in financial markets and post-trading fees (i.e. clearing and settlement fees). The clearing and settlement agent (CSD) faces different marginal costs for different types of transactions. Costs are lower for an internalized transaction, i.e. when buyer and seller originate from the same broker. We study two fee structures that the CSD applies to cover its costs. The first is a uniform fee on all trades (internalized and non-internalized) such that the CSD breaks even on average. Traders then maximize trading rates and higher post-trading fees increase observed liquidity in the market. The second fee structure features a CSD breaking even by charging the internalized and non-internalized trades their respective marginal cost. In this case, traders face the following trade-off: address all possible counterparties at the expense of considerable post-trading fees, or enjoy lower post-trading fees by targeting own-broker counterparties only. This difference in post-trading fees drives traders'strategies and thus liquidity. Furthermore, across the two fee structures, we find that observed liquidity may differ from cum-fee liquidity (which encompasses the post-trading fees). With trade-specific fees, the cum-fee spread depends on the interacting counterparties. Next, regulators can improve welfare by imposing a particular fee structure. The optimal fee structure hinges on the magnitude of the post-trading costs. Noteworthy, a fee structure yielding higher social welfare may in fact reduce observed liquidity. Finally, we consider a number of extensions including market power for the CSD, anonymous trading and differences in broker size.transaction fees;internalization;clearing and settlement;liquidity;anonymity

Dynamic Order Submission Strategies with Competition between a Dealer Market and a Crossing Network

We present a dynamic microstructure model where a dealer market (DM) and a crossing network (CN) interact. Sequentially arriving agents with different valuations for an asset maximize their profits either by trading at a DM or by submitting an order for (possibly) uncertain execution at a CN. We develop the analysis for three different informational settings: transparency, “complete” opaqueness of all order flow, and “partial” opaqueness (with observable DM trades). A key result is that the interaction of trading systems generates systematic patterns in order flow for the transparency and partial opaqueness settings. The precise nature of these patterns depends on the degree of transparency at the CN. While unambiguous with a transparent CN, they may reverse in direction if the CN is opaque. Moreover, common to the three informational settings, we find that a CN and a DM cater for different types of traders. Investors with a high willingness to trade are more likely to prefer a DM. The introduction of a CN next to a DM also affects welfare as it increases total order flow by attracting traders who would otherwise not submit orders (“order creation”); in addition, it diverts trades from the DM (“trade diversion”). We find that the coexistence of a CN and DM produces greater trader welfare than a DM in isolation. Also, more transparent markets lead to greater trader welfare but may reduce overall welfare.Alternative Trading Systems;Crossing Network;Dealer Market;Order Flow;Transparency;Welfare

Dynamic Order Submission Strategies with Competition between a Dealer Market and a Crossing Network

We present a dynamic microstructure model where a dealer market (DM) and a crossing network (CN) interact. Sequentially arriving agents with different valuations for an asset maximize their profits either by trading at a DM or by submitting an order for (possibly) uncertain execution at a CN. We develop the analysis for three different informational settings: transparency, “complete” opaqueness of all order flow, and “partial” opaqueness (with observable DM trades). A key result is that the interaction of trading systems generates systematic patterns in order flow for the transparency and partial opaqueness settings. The precise nature of these patterns depends on the degree of transparency at the CN. While unambiguous with a transparent CN, they may reverse in direction if the CN is opaque. Moreover, common to the three informational settings, we find that a CN and a DM cater for different types of traders. Investors with a high willingness to trade are more likely to prefer a DM. The introduction of a CN next to a DM also affects welfare as it increases total order flow by attracting traders who would otherwise not submit orders (“order creation”); in addition, it diverts trades from the DM (“trade diversion”). We find that the coexistence of a CN and DM produces greater trader welfare than a DM in isolation. Also, more transparent markets lead to greater trader welfare but may reduce overall welfare.

Internalization, Clearing and Settlement, and Liquidity

Abstract: We study the relation between liquidity in financial markets and post-trading fees (i.e. clearing and settlement fees). The clearing and settlement agent (CSD) faces different marginal costs for different types of transactions. Costs are lower for an internalized transaction, i.e. when buyer and seller originate from the same broker. We study two fee structures that the CSD applies to cover its costs. The first is a uniform fee on all trades (internalized and non-internalized) such that the CSD breaks even on average. Traders then maximize trading rates and higher post-trading fees increase observed liquidity in the market. The second fee structure features a CSD breaking even by charging the internalized and non-internalized trades their respective marginal cost. In this case, traders face the following trade-off: address all possible counterparties at the expense of considerable post-trading fees, or enjoy lower post-trading fees by targeting own-broker counterparties only. This difference in post-trading fees drives traders'strategies and thus liquidity. Furthermore, across the two fee structures, we find that observed liquidity may differ from cum-fee liquidity (which encompasses the post-trading fees). With trade-specific fees, the cum-fee spread depends on the interacting counterparties. Next, regulators can improve welfare by imposing a particular fee structure. The optimal fee structure hinges on the magnitude of the post-trading costs. Noteworthy, a fee structure yielding higher social welfare may in fact reduce observed liquidity. Finally, we consider a number of extensions including market power for the CSD, anonymous trading and differences in broker size.

High-resolution X-ray diffraction with no sample preparation

It is shown that energy-dispersive X-ray diffraction (EDXRD) implemented in a back-reflection geometry is extremely insensitive to sample morphology and positioning even in a high-resolution configuration. This technique allows high quality X-ray diffraction analysis of samples that have not been prepared and is therefore completely non-destructive. The experimental technique was implemented on beamline B18 at the Diamond Light Source synchrotron in Oxfordshire, UK. The majority of the experiments in this study were performed with pre-characterized geological materials in order to elucidate the characteristics of this novel technique and to develop the analysis methods. Results are presented that demonstrate phase identification, the derivation of precise unit-cell parameters and extraction of microstructural information on unprepared rock samples and other sample types. A particular highlight was the identification of a specific polytype of a muscovite in an unprepared mica schist sample, avoiding the time-consuming and difficult preparation steps normally required to make this type of identification. The technique was also demonstrated in application to a small number of fossil and archaeological samples. Back-reflection EDXRD implemented in a high-resolution configuration shows great potential in the crystallographic analysis of cultural heritage artefacts for the purposes of scientific research such as provenancing, as well as contributing to the formulation of conservation strategies. Possibilities for moving the technique from the synchrotron into museums are discussed. The avoidance of the need to extract samples from high-value and rare objects is a highly significant advantage, applicable also in other potential research areas such as palaeontology, and the study of meteorites and planetary materials brought to Earth by sample-return missions

Fractionation of lead in soil by isotopic dilution and sequential extraction

‘Reactivity’ or ‘lability’ of lead is difficult to measure using traditional methods. We investigated the use of isotopic dilution with 204Pb to determine metal reactivity in four soils historically contaminated with contrasting sources of Pb, including (i) petrol-derived Pb, (ii) Pb/Zn minespoil, (iii) long-term sewage sludge application and (iv) 19th century urban waste disposal; total soil Pb concentrations ranged from 217 to 13 600 mg kg–1. A post-spike equilibration period of 3 days and suspension in 5.0 × 10–4 M ethylenediaminetetraacetic acid provided reasonably robust conditions for measuring isotopically exchangeable Pb. However, in acidic organic soils a dilute Ca(NO3)2 electrolyte may be preferable to avoid mobilisation of ‘non-labile’ Pb. Results showed that the reactive pool of soil Pb can be a large proportion of the total soil lead content but varies with the original Pb source. A comparison of isotopic exchangeability with the results of a sequential extraction procedure showed that (isotopically) ‘non-labile’ Pb may be broadly equated with ‘residual’ Pb in organic soils. However, in mineral soils the ‘carbonate’ and ‘oxide-bound’ Pb fractions included non-labile forms of Pb. The individual isotopic signatures of labile and non-labile Pb pools suggested that, despite prolonged contact with soil, differences between the lability of the original contaminant and the native soil Pb may remain