Pub Date : 2010-12-09DOI: 10.1142/9789814383585_0011
Fuzhou Gong, Deqing Zhou
Kyle (1985) builds a pioneering and influential model, in which an insider with long-lived private information submits an optimal order in each period given the market maker's pricing rule. An inconsistency exists to some extent in the sense that the ``constant pricing rule " actually assumes an adaptive expected price with pricing rule given before insider making the decision, and the ``market efficiency" condition, however, assumes a rational expected price and implies that the pricing rule can be influenced by insider's strategy. We loosen the ``constant pricing rule " assumption by taking into account sufficiently the insider's strategy has on pricing rule. According to the characteristic of the conditional expectation of the informed profits, three different models vary with insider's attitudes regarding to risk are presented. Compared to Kyle (1985), the risk-averse insider in Model 1 can obtain larger guaranteed profits, the risk-neutral insider in Model 2 can obtain a larger ex ante expectation of total profits across all periods and the risk-seeking insider in Model 3 can obtain larger risky profits. Moreover, the limit behaviors of the three models when trading frequency approaches infinity are given, showing that Model 1 acquires a strong-form efficiency, Model 2 acquires the Kyle's (1985) continuous equilibrium, and Model 3 acquires an equilibrium with information released at an increasing speed.
{"title":"Insider Trading in the Market with Rational Expected Price","authors":"Fuzhou Gong, Deqing Zhou","doi":"10.1142/9789814383585_0011","DOIUrl":"https://doi.org/10.1142/9789814383585_0011","url":null,"abstract":"Kyle (1985) builds a pioneering and influential model, in which an insider with long-lived private information submits an optimal order in each period given the market maker's pricing rule. An inconsistency exists to some extent in the sense that the ``constant pricing rule \" actually assumes an adaptive expected price with pricing rule given before insider making the decision, and the ``market efficiency\" condition, however, assumes a rational expected price and implies that the pricing rule can be influenced by insider's strategy. We loosen the ``constant pricing rule \" assumption by taking into account sufficiently the insider's strategy has on pricing rule. According to the characteristic of the conditional expectation of the informed profits, three different models vary with insider's attitudes regarding to risk are presented. Compared to Kyle (1985), the risk-averse insider in Model 1 can obtain larger guaranteed profits, the risk-neutral insider in Model 2 can obtain a larger ex ante expectation of total profits across all periods and the risk-seeking insider in Model 3 can obtain larger risky profits. Moreover, the limit behaviors of the three models when trading frequency approaches infinity are given, showing that Model 1 acquires a strong-form efficiency, Model 2 acquires the Kyle's (1985) continuous equilibrium, and Model 3 acquires an equilibrium with information released at an increasing speed.","PeriodicalId":8509,"journal":{"name":"arXiv: Trading and Market Microstructure","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2010-12-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89426115","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2010-10-20DOI: 10.1007/978-88-470-1766-5_11
K. Dayri, E. Bacry, J. Muzy
{"title":"The Nature of Price Returns During Periods of High Market Activity","authors":"K. Dayri, E. Bacry, J. Muzy","doi":"10.1007/978-88-470-1766-5_11","DOIUrl":"https://doi.org/10.1007/978-88-470-1766-5_11","url":null,"abstract":"","PeriodicalId":8509,"journal":{"name":"arXiv: Trading and Market Microstructure","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2010-10-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82862207","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We use the 2008 short selling regulations to conduct the first test of Diamond and Verrecchia’s (1987) counterintuitive prediction that short sale constraints can actually increase the information content of short sales. The emergency order made it difficult and costly for short sellers without strong broker relationships to borrow shares; borrowing fees increased by over 500%. Similarly, the short selling ban prohibited short selling in the spot market, but sophisticated traders could still short synthetically via the options market. As such, there is good reason to expect that both regulations increased the proportion of informed short sellers. Consistent with this notion, we find that the price reaction to announcements of unexpectedly high levels of short interest became more negative when the regulations were in effect. We also find that the price impact of short sales increased during the ban for affected stocks. Our results confirm the counterintuitive and previously untested prediction that short selling restrictions may actually increase the information content of short selling.
{"title":"Can Short Restrictions Result in More Informed Short Selling? Evidence from the 2008 Regulations","authors":"Adam Kolasinski, Adam V. Reed, Jacob R. Thornock","doi":"10.2139/ssrn.1365037","DOIUrl":"https://doi.org/10.2139/ssrn.1365037","url":null,"abstract":"We use the 2008 short selling regulations to conduct the first test of Diamond and Verrecchia’s (1987) counterintuitive prediction that short sale constraints can actually increase the information content of short sales. The emergency order made it difficult and costly for short sellers without strong broker relationships to borrow shares; borrowing fees increased by over 500%. Similarly, the short selling ban prohibited short selling in the spot market, but sophisticated traders could still short synthetically via the options market. As such, there is good reason to expect that both regulations increased the proportion of informed short sellers. Consistent with this notion, we find that the price reaction to announcements of unexpectedly high levels of short interest became more negative when the regulations were in effect. We also find that the price impact of short sales increased during the ban for affected stocks. Our results confirm the counterintuitive and previously untested prediction that short selling restrictions may actually increase the information content of short selling.","PeriodicalId":8509,"journal":{"name":"arXiv: Trading and Market Microstructure","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2010-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82439634","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Addressing the ongoing examination of high-frequency trading practices in financial markets, we report the results of an extensive empirical study estimating the maximum possible profitability of the most aggressive such practices, and arrive at figures that are surprisingly modest. By "aggressive" we mean any trading strategy exclusively employing market orders and relatively short holding periods. Our findings highlight the tension between execution costs and trading horizon confronted by high-frequency traders, and provide a controlled and large-scale empirical perspective on the high-frequency debate that has heretofore been absent. Our study employs a number of novel empirical methods, including the simulation of an "omniscient" high-frequency trader who can see the future and act accordingly.
{"title":"Empirical Limitations on High Frequency Trading Profitability","authors":"Michael Kearns, Alex Kulesza, Yuriy Nevmyvaka","doi":"10.2139/ssrn.1678758","DOIUrl":"https://doi.org/10.2139/ssrn.1678758","url":null,"abstract":"Addressing the ongoing examination of high-frequency trading practices in financial markets, we report the results of an extensive empirical study estimating the maximum possible profitability of the most aggressive such practices, and arrive at figures that are surprisingly modest. By \"aggressive\" we mean any trading strategy exclusively employing market orders and relatively short holding periods. Our findings highlight the tension between execution costs and trading horizon confronted by high-frequency traders, and provide a controlled and large-scale empirical perspective on the high-frequency debate that has heretofore been absent. Our study employs a number of novel empirical methods, including the simulation of an \"omniscient\" high-frequency trader who can see the future and act accordingly.","PeriodicalId":8509,"journal":{"name":"arXiv: Trading and Market Microstructure","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2010-07-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80883366","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We quantify the effects of closing price manipulation on trading characteristics and stock price accuracy using a unique sample of prosecuted manipulation cases. Based on these findings we construct an index of the probability and intensity of closing price manipulation. As well as having regulatory applications, this index can be used to study manipulation in the large number of markets and time periods in which prosecution data are not readily available.
{"title":"Measuring Closing Price Manipulation","authors":"Carole Comerton-Forde, Tālis J. Putniņš","doi":"10.2139/ssrn.1009001","DOIUrl":"https://doi.org/10.2139/ssrn.1009001","url":null,"abstract":"We quantify the effects of closing price manipulation on trading characteristics and stock price accuracy using a unique sample of prosecuted manipulation cases. Based on these findings we construct an index of the probability and intensity of closing price manipulation. As well as having regulatory applications, this index can be used to study manipulation in the large number of markets and time periods in which prosecution data are not readily available.","PeriodicalId":8509,"journal":{"name":"arXiv: Trading and Market Microstructure","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2009-11-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76090988","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate the effect of the removal of broker identities on institutional and individual order submissions on the Australian Stock Exchange (ASX). We document declines in order aggressiveness and effective spreads for both institutional and individual investors after the switch to the anonymous trading system. Institutions are more willing to improve the best quotes than individuals, especially in the anonymous market. Anonymity also reduces the “picked off” risk for individual limit orders. Overall, our findings highlight the benefits of withholding brokers' IDs in the form of lower transaction costs and higher liquidity supply and thus support the ASX's decision to stop disclosing broker identity information.
{"title":"Anonymity and Order Submissions","authors":"H. N. Duong, P. Kalev","doi":"10.2139/ssrn.1445311","DOIUrl":"https://doi.org/10.2139/ssrn.1445311","url":null,"abstract":"We investigate the effect of the removal of broker identities on institutional and individual order submissions on the Australian Stock Exchange (ASX). We document declines in order aggressiveness and effective spreads for both institutional and individual investors after the switch to the anonymous trading system. Institutions are more willing to improve the best quotes than individuals, especially in the anonymous market. Anonymity also reduces the “picked off” risk for individual limit orders. Overall, our findings highlight the benefits of withholding brokers' IDs in the form of lower transaction costs and higher liquidity supply and thus support the ASX's decision to stop disclosing broker identity information.","PeriodicalId":8509,"journal":{"name":"arXiv: Trading and Market Microstructure","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2009-08-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86375370","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines the effects of the direction of trade initiation and trade size on the resiliency of financial futures markets by analysing quote prices, bid-ask spreads and depths. The price and liquidity reactions reveal the unexpected information content of large trades, together with the motivation for exchanging a futures contract. In the market adjustment process, the size of quotes posted by liquidity providers are shown to play a more important role in futures markets than in previous research for equity markets. The liquidity cost of a large futures trade is mainly a pecuniary externality borne by other traders by impairing their continued ability to trade.
{"title":"Price Formation and Liquidity Surrounding Large Trades in Interest Rate and Equity Index Futures","authors":"J. R. Cummings, A. Frino","doi":"10.2139/ssrn.1252782","DOIUrl":"https://doi.org/10.2139/ssrn.1252782","url":null,"abstract":"This paper examines the effects of the direction of trade initiation and trade size on the resiliency of financial futures markets by analysing quote prices, bid-ask spreads and depths. The price and liquidity reactions reveal the unexpected information content of large trades, together with the motivation for exchanging a futures contract. In the market adjustment process, the size of quotes posted by liquidity providers are shown to play a more important role in futures markets than in previous research for equity markets. The liquidity cost of a large futures trade is mainly a pecuniary externality borne by other traders by impairing their continued ability to trade.","PeriodicalId":8509,"journal":{"name":"arXiv: Trading and Market Microstructure","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2009-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84952779","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2009-03-13DOI: 10.1017/9781316659335.016
J. Bouchaud
We define what "Price Impact" means, and how it is measured and modelled in the recent literature. Although this notion seems to convey the idea of a forceful and intuitive mechanism, we discuss why things might not be that simple. Empirical studies show that while the correlation between signed order flow and price changes is strong, the impact of trades on prices is neither linear in volume nor permanent. Impact allows private information to be reflected in prices, but by the same token, random fluctuations in order flow must also contribute to the volatility of markets.
{"title":"Price Impact","authors":"J. Bouchaud","doi":"10.1017/9781316659335.016","DOIUrl":"https://doi.org/10.1017/9781316659335.016","url":null,"abstract":"We define what \"Price Impact\" means, and how it is measured and modelled in the recent literature. Although this notion seems to convey the idea of a forceful and intuitive mechanism, we discuss why things might not be that simple. Empirical studies show that while the correlation between signed order flow and price changes is strong, the impact of trades on prices is neither linear in volume nor permanent. Impact allows private information to be reflected in prices, but by the same token, random fluctuations in order flow must also contribute to the volatility of markets.","PeriodicalId":8509,"journal":{"name":"arXiv: Trading and Market Microstructure","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2009-03-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86411356","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In illiquid markets, option traders may have an incentive to increase their portfolio value by using their impact on the dynamics of the underlying. We provide a mathematical framework within which to value derivatives under market impact in a multi-player framework by introducing strategic interactions into the Almgren & Chriss (2001) model. Specifically, we consider a financial market model with several strategically interacting players that hold European contingent claims and whose trading decisions have an impact on the price evolution of the underlying. We establish existence and uniqueness of equilibrium results and show that the equilibrium dynamics can be characterized in terms of a coupled system of possibly non-linear PDEs. For the linear cost function used in Almgren & Chriss (2001), we obtain (semi) closed form solutions for risk neutral or CARA investors. Finally, we indicate how spread crossing costs discourage market manipulation.
{"title":"Illiquidity and Derivative Valuation","authors":"U. Horst, Felix Naujokat","doi":"10.18452/4239","DOIUrl":"https://doi.org/10.18452/4239","url":null,"abstract":"In illiquid markets, option traders may have an incentive to increase their portfolio value by using their impact on the dynamics of the underlying. We provide a mathematical framework within which to value derivatives under market impact in a multi-player framework by introducing strategic interactions into the Almgren & Chriss (2001) model. Specifically, we consider a financial market model with several strategically interacting players that hold European contingent claims and whose trading decisions have an impact on the price evolution of the underlying. We establish existence and uniqueness of equilibrium results and show that the equilibrium dynamics can be characterized in terms of a coupled system of possibly non-linear PDEs. For the linear cost function used in Almgren & Chriss (2001), we obtain (semi) closed form solutions for risk neutral or CARA investors. Finally, we indicate how spread crossing costs discourage market manipulation.","PeriodicalId":8509,"journal":{"name":"arXiv: Trading and Market Microstructure","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2008-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90058105","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines shifting liquidity in the corporate bond market and illustrates how cross market comparisons can lead to misleading inferences regarding market efficiency when liquidity and trading patterns are ignored. For example, when institutional trade dominance and other bond trading features are accounted for, stock leads evidenced in earlier studies are surprisingly reversed. Moreover, bond prices often fully adjust to news before equity market open. Informational advantages are most pronounced during low equity market liquidity and price discovery periods. Finally, dynamic liquidity patterns give rise to ‘top bonds’, which are those attracting most institutional sized trades after news and are shown to play an important role in the price discovery process. These bonds shift identity over time but exhibit common ex-ante identifiable characteristics.
{"title":"Where Did All the Information Go? Trade in the Corporate Bond Market","authors":"Tavy Ronen, Xing (Alex) Zhou","doi":"10.2139/ssrn.1085638","DOIUrl":"https://doi.org/10.2139/ssrn.1085638","url":null,"abstract":"This paper examines shifting liquidity in the corporate bond market and illustrates how cross market comparisons can lead to misleading inferences regarding market efficiency when liquidity and trading patterns are ignored. For example, when institutional trade dominance and other bond trading features are accounted for, stock leads evidenced in earlier studies are surprisingly reversed. Moreover, bond prices often fully adjust to news before equity market open. Informational advantages are most pronounced during low equity market liquidity and price discovery periods. Finally, dynamic liquidity patterns give rise to ‘top bonds’, which are those attracting most institutional sized trades after news and are shown to play an important role in the price discovery process. These bonds shift identity over time but exhibit common ex-ante identifiable characteristics.","PeriodicalId":8509,"journal":{"name":"arXiv: Trading and Market Microstructure","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2008-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76549162","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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