Market evidence on the opaqueness of banking firms' assets.

We assess the market microstructure properties of U.S. banking firms' equity, to determine whether they exhibit more or less evidence of asset opaqueness than similar-sized nonbanking firms. The evidence strongly indicates that large banks (traded on NASDAQ) trade much less frequently despite microstructure characteristics. Problem (noncurrent) loans tend to raise the frequency with which the bank's equity trades, as well as the equity's return volatility. The implications for regulatory policy and future market microstructure research are discussed.Bank stocks ; Bank assets

The 2007-09 financial crisis and bank opaqueness

Doubts about the accuracy with which outside investors can assess a banking firm’s value motivate many government interventions in the banking market. The recent financial crisis has reinforced concerns about the possibility that banks are unusually opaque. Yet the empirical evidence, thus far, is mixed. This paper examines the trading characteristics of bank shares over the period from January 1990 through September 2009. We find that bank share trading exhibits sharply different features before vs. during the crisis. Until mid-2007, large (NYSE-traded) banking firms appear to be no more opaque than a set of control firms, and smaller (NASD-traded) banks are, at most, slightly more opaque. During the crisis, however, both large and small banking firms exhibit a sharp increase in opacity, consistent with the policy interventions implemented at the time. Although portfolio composition is significantly related to market microstructure variables, no specific asset category(s) stand out as particularly important in determining bank opacity.Banks and banking ; Stock market ; Financial crises

High-frequency trading in the stock market and the costs of options market making

We investigate how high-frequency trading (HFT) in equity markets affects options market liquidity. We find that increased aggressive HFT activity in the stock market leads to wider bid–ask spreads in the options market through two main channels. First, options market makers’ quotes are exposed to sniping risk from HFTs exploiting put–call parity violations. Second, informed trading in the options market further amplifies the impact of HFT in equity markets on the liquidity of options by simultaneously increasing the options bid–ask spread and intensifying aggressive HFT activity in the underlying market

High-frequency trading in the stock market and the costs of option market making

Using a comprehensive panel of 2,969,829 stock-day data provided by the Securities and Exchange Commission (MIDAS), we find that HFT activity in the stock market increases market-making costs in the options markets. We consider two potential channels - the hedging channel and the arbitrage channel - and find that HFTs' liquidity-demanding orders increase the hedging costs due to a higher stock bid-ask spread and a higher price impact for larger hedging demand. The arbitrage channel subjects the options market-maker to the risk of trading at stale prices. We show that the hedging (arbitrage) channel is dominant for ATM (ITM) options. Given the significant growth in options trading, we believe that our study highlights the need to better understand the costs/risks due to HFT activities in equity markets on derivative markets

Components of short-horizon individual security returns

In this paper, we present a simple model which relates security returns to three components: an expected return, a bid-ask error, and white noise. The relative importance of the various components is empirically assessed, and the model's ability to explain the various time-series properties of individual security and portfolio returns is tested. Time-varying expected returns and bid-ask errors are found to explain substantial proportions (up to 24%) of the variance of security returns. We also reconcile the typically negative autocorrelation in security returns with the strong positive autocorrelation in portfolio returns.Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/29106/1/0000144.pd

Ascaroside Expression in Caenorhabditis elegans Is Strongly Dependent on Diet and Developmental Stage

Background: The ascarosides form a family of small molecules that have been isolated from cultures of the nematode Caenorhabditis elegans. They are often referred to as “dauer pheromones” because most of them induce formation of long-lived and highly stress resistant dauer larvae. More recent studies have shown that ascarosides serve additional functions as social signals and mating pheromones. Thus, ascarosides have multiple functions. Until now, it has been generally assumed that ascarosides are constitutively expressed during nematode development. Methodology/Principal Findings: Cultures of C. elegans were developmentally synchronized on controlled diets. Ascarosides released into the media, as well as stored internally, were quantified by LC/MS. We found that ascaroside biosynthesis and release were strongly dependent on developmental stage and diet. The male attracting pheromone was verified to be a blend of at least four ascarosides, and peak production of the two most potent mating pheromone components, ascr#3 and asc#8 immediately preceded or coincided with the temporal window for mating. The concentration of ascr#2 increased under starvation conditions and peaked during dauer formation, strongly supporting ascr#2 as the main population density signal (dauer pheromone). After dauer formation, ascaroside production largely ceased and dauer larvae did not release any ascarosides. These findings show that both total ascaroside production and the relative proportions of individual ascarosides strongly correlate with these compounds' stage-specific biological functions. Conclusions/Significance: Ascaroside expression changes with development and environmental conditions. This is consistent with multiple functions of these signaling molecules. Knowledge of such differential regulation will make it possible to associate ascaroside production to gene expression profiles (transcript, protein or enzyme activity) and help to determine genetic pathways that control ascaroside biosynthesis. In conjunction with findings from previous studies, our results show that the pheromone system of C. elegans mimics that of insects in many ways, suggesting that pheromone signaling in C. elegans may exhibit functional homology also at the sensory level. In addition, our results provide a strong foundation for future behavioral modeling studies

Do brokers act in the best interests of their clients? New evidence from electronic trading systems

Prior research suggests brokers do not always act in the best interests of clients, although morally obligated to do so. We empirically investigated this issue focusing on trades executed at best execution price, before and after the introduction of electronic limit-order trading, on the London Stock Exchange. As a result of limit-order trading, the proportion of trades executed at the best execution price for the customer significantly increased. We attribute this to a sustained increase in the liquidity of stocks as a result of limit-order trading, regardless of market capitalisation. We discuss the ethical implications of our findings and conclude that market structures that enhance market competitiveness may help reconcile broker and client interests

Intraday Behavior of Stock Prices and Trades around Insider Trading

Our evidence indicates that insiders’ trades provide significant new information to market participants and they are incorporated more fully in stock prices as compared to noninsiders’ trades. We find that market professionals do not front-run insiders’ trades. Both insiders’ purchases and sales result in significant contemporaneous and subsequent price impact, while sales by large shareholders result in a contemporaneous stock price decline that is subsequently reversed. The arrival of insider purchases reverse the prevailing negative order imbalances from third party trades and lead to piggy-backing by market professionals resulting in subsequent market purchase orders as well as stock price increases.Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/79103/1/j.1755-053X.2009.01075.x.pd

How do financial intermediaries create value in security issues?

We study incentive provision in a model of securities issuance with an informed issuer and uninformed investors. We show that the presence of an informed intermediary may increase surplus even if we allow for collusion between the intermediary and the issuer. Collusion is neutralized by introducing a misalignment between the interests of the issuer and those of the intermediary. To achieve this, the intermediary commits to hold some of the securities. The intermediary then underprices the remaining securities and extracts any investor surplus through a “participation fee.” We provide an explanation for the diffusion of book building and quid pro quo practices in Initial Public Offerings (IPOs)

Non-Standard Errors

In statistics, samples are drawn from a population in a data-generating process (DGP). Standard errors measure the uncertainty in estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence-generating process (EGP). We claim that EGP variation across researchers adds uncertainty: Non-standard errors (NSEs). We study NSEs by letting 164 teams test the same hypotheses on the same data. NSEs turn out to be sizable, but smaller for better reproducible or higher rated research. Adding peer-review stages reduces NSEs. We further find that this type of uncertainty is underestimated by participants