Volume dynamics and multimarket trading

peer reviewe

You Can’t Always Get What You Want: Trade-size Clustering and Quantity Choice in Liquidity”,

Abstract This paper examines whether investors care more about trading their exact quantity demands at some times than at others. Using a new data set of foreign-exchange transactions, I find that customers trade more precise quantities at quarter-end, as evidenced by less trade-size clustering. Customers trade more odd lots and fewer round lots, while the number of trades and total volume are not significantly changed. I also find that the price impact of order flow is greater when customers care more about trading precise quantities. This work sheds new light on trade-size clustering and offers a potential explanation for time-series and cross-sectional variations in common liquidity measures. JEL classification: D4; G12; G1

The Specialist's Participation in Quoted Prices and the NYSE's Price Continuity Rule

There is a significant disparity between theoretical and empirical models of the Specialist's adjustment for inventory risk. Whereas theoretical work has shown that Specialist inventory rebalancing through the quoted prices is important to the functioning of the market, empiricists have failed to identify any evidence of this action intradaily. By partitioning the Specialist actions as active or passive, conditioned on the Price Continuity Rule, this study shows that the Specialist engages in active inventory rebalancing throughout the trading day. The paper finds that the Specialist's obligations - set by the NYSE - of achieving price continuity and smooth price changes come at a significant cost for the Specialist. However, he manages to mitigate this cost through his own actions when the rules are not binding. The implications of this paper have direct bearing on the current debate as to whether the NYSE design should be restructured.Quoted Prices, specialist, limit order book, price continuity rule

The Specialist`s Participation in Quoted Prices and the NYSE`s Price Continuity Rule

There is a significant disparity between theoretical and empirical models on the Specialist`s adjustment of inventory risk. Whereas theoretical work has shown that Specialist inventory rebalancing through the quoted prices is important to the functioning of the market, empiricists have failed to identify any evidence of this action intradaily. By partitioning the Specialist actions as active or passive, conditioned on the Price Continuity Rule, this study shows that the Specialist engages in active inventory rebalancing throughout the trading day. The paper finds that the Specialist`s obligations -set by the NYSE- of achieving price continuity and smooth price changes come at a significant cost for the Specialist. However, he manages to mitigate this cost through his own actions when the rules are not binding. The implications of this paper have direct bearing on the current debate as to whether the NYSE design should be restructured.Quoted Prices

The Role of the Market Maker in International Capital Markets: Challenges and Benefits of Implementation in Emerging Markets

Different forms of market making systems can be found in most developed capital markets. These markets, instead of having a pure electronic limit order book design, follow one of three forms of market making: 1) a quote-driven market making system, 2)a centralized market making system in an order-driven market, and 3) a non-centralized market making system in an order-driven market. This paper analyzes and critically evaluates each system, especially in relation to the application of these designs in emerging capital markets. These countries, in an effort to restructure their market design into a more efficient and attractive venue for international investors, are required to adopt one of the three market making systems found mainly in developed countries. In this study we provide guidance to emerging market regulators for implementing a market making system and prescribe the factors that should be taken into consideration when redesigning their trading system. The challenges and benefits of such an application are set forward along with possible alternatives.Emerging Capital Markets

Volume Dynamics and Multimarket Trading

The trading of shares of the same firm in multiple markets has become common over the last thirty years, but there is little empirical evidence on the extent to which investors actively exploit multimarket environments. We introduce a volume-based measure of multimarket trading to address this question. Analyzing a large set of cross-listed firms, we find higher multimarket trading among markets with similar designs and strong enforcement of insider trading laws and for firms with higher institutional ownership. These findings are important for firms evaluating the benefits of cross-listing and for markets competing for order flow.Moulton1_Volume_Dynamics.pdf: 337 downloads, before Aug. 1, 2020

Hidden Liquidity: An Analysis of Order Exposure Strategies in Electronic Stock Markets

Many stock exchanges choose to reduce market transparency by allowing traders to hide some or all of their order size. We study costs and benefits of hidden order usage for a sample of Euronext-Paris stocks, where hidden orders represent 44% of sample order volume. All else equal, hidden orders are associated with smaller opportunity costs and lower implementation shortfall costs. However, hidden orders are less likely to execute completely and exhibit longer times to execution. The presence and magnitude of hidden orders can be predicted to a significant but imperfect degree based on observable order attributes, firm characteristics and market conditions. We find that the option to hide order size is used differently by traders who submit passive versus aggressively priced orders. Specifically, aggressively priced orders tend to be exposed, to draw out potential counterparties and allow quick execution, while larger and less aggressively priced orders tend to be hidden, to reduce the option value of standing limit orders. Overall, the results indicate that the option to hide order size is valuable, in particular to patient traders without superior information on future security price movements

Informed Trading and Price Discovery before Corporate Events

Stock prices incorporate less “news” before negative events than positive events. Further, we find evidence that informed agents use less price aggressive (limit) orders before negative events and more price aggressive (market) orders before positive events ( buy-sell asymmetry ). Motivated by these patterns, we model the execution risk that informed agents impose on each other and relate the asymmetry to costly short selling. When investor base is narrow, security borrowing is difficult, or the magnitude of the event is small, buy-sell asymmetry is pronounced and price discovery before negative events is lower. Overall, informed agents\u27 strategies influence the process of price formation in financial markets, as predicted by theory