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

The determinants of savings in the third pension pillar

The paper analyses participation in and contributions to the third pillar of the pension system by Belgian households. This pillar represents individual saving for retirement and has been growing rapidly. A detailed dataset of tax declarations over the period from 1993 until 2003 was used to analyse the possible determinants of saving in the third pillar. Firstly, this dataset makes an analysis from a macroeconomic point of view possible, showing an apparent increase in total contributions to the third pillar by 39 p.c. in real terms between 1993 and 2003. This increase is mainly due to a rise in the participation rate (29 p.c. in 1993 and 40 p.c. in 2003). A detailed analysis is provided across the age groups, which further shows the influence of the demographic evolution, the average income of the participants in the third pillar and the contribution rate. The dataset also helps point up a wide number of possible microeconomic determinants of saving for retirement, such as age, income, professional status, civil status, region of residence, property ownership, employment situation, participation in second pillar pension schemes, number of dependents, etc. Moreover, the database allows a distinction to be made between the two forms in the third pillar : pension saving and life insurance. From such a microeconomic point of view, the analysis sheds some light on the major determinants of participation to the third pillar. The main findings show that older households are more likely to opt for a third pillar pension scheme. Furthermore, it appears that households consider the two forms of the third pillar as being complementary rather than substitutes for each other : households that participate in pension saving schemes are also more likely to take out life insurance and vice versa. Besides age, the other determinants that have a positive impact on participation in the third pillar of the pension system are : having higher income, being self-employed, getting an early retirement pension, being a home owner, being married and living in Flanders rather than Brussels or Wallonia.personal finance, pension fund, life insurance, private pensions

On the lack of correlation between Mg II 2796, 2803 Angstrom and Lyman alpha emission in lensed star-forming galaxies

We examine the Mg II 2796, 2803 Angstrom, Lyman alpha, and nebular line emission in five bright star-forming galaxies at 1.66<z<1.91 that have been gravitationally lensed by foreground galaxy clusters. All five galaxies show prominent Mg II emission and absorption in a P Cygni profile. We find no correlation between the equivalent widths of Mg II and Lyman alpha emission. The Mg II emission has a broader range of velocities than do the nebular emission line profiles; the Mg II emission is redshifted with respect to systemic by 100 to 200 km/s. When present, Lyman alpha is even more redshifted. The reddest components of Mg II and Lyman alpha emission have tails to 500-600 km/s, implying a strong outflow. The lack of correlation in the Mg II and Lyman alpha equivalent widths, the differing velocity profiles, and the high ratios of Mg II to nebular line fluxes together suggest that the bulk of Mg II emission does not ultimately arise as nebular line emission, but may instead be reprocessed stellar continuum emission.Comment: The Astrophysical Journal, in press. 6 pages, 2 figure

The size-star formation relation of massive galaxies at 1.5<z<2.5

We study the relation between size and star formation activity in a complete sample of 225 massive (M > 5 x 10^10 Msun) galaxies at 1.5<z<2.5, selected from the FIREWORKS UV-IR catalog of the CDFS. Based on stellar population synthesis model fits to the observed restframe UV-NIR SEDs, and independent MIPS 24 micron observations, 65% of galaxies are actively forming stars, while 35% are quiescent. Using sizes derived from 2D surface brightness profile fits to high resolution (FWHM_{PSF}~0.45 arcsec) groundbased ISAAC data, we confirm and improve the significance of the relation between star formation activity and compactness found in previous studies, using a large, complete mass-limited sample. At z~2, massive quiescent galaxies are significantly smaller than massive star forming galaxies, and a median factor of 0.34+/-0.02 smaller than galaxies of similar mass in the local universe. 13% of the quiescent galaxies are unresolved in the ISAAC data, corresponding to sizes <1 kpc, more than 5 times smaller than galaxies of similar mass locally. The quiescent galaxies span a Kormendy relation which, compared to the relation for local early types, is shifted to smaller sizes and brighter surface brightnesses and is incompatible with passive evolution. The progenitors of the quiescent galaxies, were likely dominated by highly concentrated, intense nuclear star bursts at z~3-4, in contrast to star forming galaxies at z~2 which are extended and dominated by distributed star formation.Comment: 6 pages, 4 figures, accepted for publication in Ap

Structure and dynamics of high-z galaxies

HST and integral-field spectroscopic observations of star-forming galaxies at cosmic noon provide a view on the spatial distribution of stars, gas and dust, and probe gaseous motions revealing the central gravitational potential and local feedback processes at play. In this paper, we review recent insights gained from such observations, with an emphasis on results obtained through near-infrared imaging spectroscopy. Their context and implications are documented more fully in a forthcoming review article by Förster Schreiber &amp; Wuyts (in prep).</p

Star-Forming Galaxies at Cosmic Noon

Ever deeper and wider lookback surveys have led to a fairly robust outline of the cosmic star formation history, which culminated around z~2 -- a period often nicknamed "cosmic noon." Our knowledge about star-forming galaxies at these epochs has dramatically advanced from increasingly complete population censuses and detailed views of individual galaxies. We highlight some of the key observational insights that influenced our current understanding of galaxy evolution in the equilibrium growth picture: ∙ scaling relations between galaxy properties are fairly well established among massive galaxies at least out to z~2, pointing to regulating mechanisms already acting on galaxy growth; ∙ resolved views reveal that gravitational instabilities and efficient secular processes within the gas- and baryon-rich galaxies at z~2 play an important role in the early build-up of galactic structure; ∙ ever more sensitive observations of kinematics at z~2 are probing the baryon and dark matter budget on galactic scales and the links between star-forming galaxies and their likely descendants; ∙ towards higher masses, massive bulges, dense cores, and powerful AGN and AGN-driven outflows are more prevalent and likely play a role in quenching star formation. We outline emerging questions and exciting prospects for the next decade with upcoming instrumentation, including the James Webb Space Telescope and the next generation of Extremely Large Telescopes

Resolved views on early galaxy evolution

Resolved observations of star-forming galaxies at cosmic noon with the Hubble Space Telescope and large ground-based facilities provide a view on the spatial distribution of stars, gas and dust, and probe gaseous motions revealing the central gravitational potential and local feedback processes at play. In this paper, we review recent insights gained from such observations, with an emphasis on results obtained through optical/near-infrared imaging and imaging spectroscopy. Their context and implications are documented more fully in a forthcoming review article by Förster Schreiber & Wuyts (in prep)