Market Fragmentation

2021 ◽  
Vol 111 (7) ◽  
pp. 2247-2274
Author(s):  
Daniel Chen ◽  
Darrell Duffie
Keyword(s):  
Private Information ◽  
Allocative Efficiency ◽  
Price Impact ◽  
Inhibiting Effect ◽  
Market Depth ◽  
Price Impacts ◽  
Market Fragmentation

We model a simple market setting in which fragmentation of trade of the same asset across multiple exchanges improves allocative efficiency. Fragmentation reduces the inhibiting effect of price-impact avoidance on order submission. Although fragmentation reduces market depth on each exchange, it also isolates cross-exchange price impacts, leading to more aggressive overall order submission and better rebalancing of unwanted positions across traders. Fragmentation also has implications for the extent to which prices reveal traders’ private information. While a given exchange price is less informative in more fragmented markets, all exchange prices taken together are more informative. (JEL D47, D82, G14)

Broker ID transparency and price impact of trades: evidence from the Korean Exchange

2015 ◽  
Vol 11 (1) ◽  
pp. 117-131 ◽  
Author(s):  
Thu Phuong Pham
Keyword(s):  
Stock Market ◽  
Private Information ◽  
Stock Exchange ◽  
Price Impact ◽  
Least Square ◽  
Market Quality ◽  
Order Book ◽  
Information Effect ◽  
Content Type ◽  
Market Depth

Purpose – The purpose of this paper is to examine the changes in the price impact of trades in the major Korean stock market following the introduction of disclosure to all traders of the top five brokers on the buy-side and the top five brokers on the sell-side of trades in real time for each stock in the KOSDAQ market. Design/methodology/approach – The paper uses several alternative metrics for the price impact of trades. The study applies estimation methodology that accounts for the potential endogeneity of other market quality proxies, which are used as control variables in price impact regressions, by utilizing two-stage-least-square methods with fixed effect specification. Findings – This study finds that the permanent price impact (information effect) of both buyer- and seller-initiated trades increases, which indicates that information is disseminated quicker in a transparent market. Uninformed trades have a larger permanent price impact than informed trades on both the buy and sell sides. The liquidity price effects are found to be mixed for buys and sells. Research limitations/implications – The study supports the current policy of the Korean Exchange to publicly display the five most active broker IDs on both the buy and sell sides, as it attracts both informed and liquidity traders, leading to faster price discovery in a more transparent market. However, a future study which analyzes the change in the market quality in both local markets would provide a complete picture of the effects of the policy. Originality/value – Earlier studies documenting the effect of broker ID disclosure on market quality used effective spreads, market depth or order book imbalance as market quality measures. This study contributes to the existing literature by examining the changes in direct measures of the private information effect and liquidity effect of trades in a stock market – the Korean Stock Exchange – when the other part of the exchange (the KOSDAQ stock market) shifts to public broker ID transparency at the same transparency level.

scholarly journals Option Implied Stock Buy-Side and Sell-Side Market Depths

Risks ◽  
2019 ◽  
Vol 7 (4) ◽  
pp. 108
Author(s):  
Tsai
Keyword(s):  
Stock Market ◽  
Stock Prices ◽  
Price Impact ◽  
Option Prices ◽  
Bear Market ◽  
Market Depth ◽  
Price Impacts ◽  
Event Date ◽  
Trading Activities ◽  
The Difference

This paper investigates option valuation when the underlying market suffers from illiquidity of price impact. Using option data, I infer trading activities and price impacts on the buy side and the sell side in the stock market from option prices across maturities. The finding displays that the stock market is active when the stock prices plummet, but becomes silent after the market crashes. In addition, the difference of option implied price impacts between the buy side and the sell side, which indicates asymmetric liquidity, increases with the time to maturity, especially on the day of the market crisis. Moreover, investors have different perspectives on the future liquidity after liquidity shocks when they are in a bull market or in a bear market according to the option implied price impact (or market depth) curves. I also calibrate three market indices simultaneously and reach the same conclusion that the three markets become erratic on the event date and calm down in the aftermath.

scholarly journals The Existence of Equilibrium Asset Price Under Diverse Information

2005 ◽  
Vol 7 (3) ◽  
pp. 351
Author(s):  
R. Agus Sartono
Keyword(s):  
Private Information ◽  
Rational Expectation ◽  
Asset Price ◽  
Weighted Average ◽  
Cash Flows ◽  
Existence Of Equilibrium ◽  
Risky Assets ◽  
Market Depth ◽  
Expectation Model ◽  
Informed Traders

We investigate the effects of diverse information on the price of risky assets in rational expectation model. The expected cash flows innovation is considered as private information where informed trader knows it. It is assumed that the high informed trader has smaller variance error regarding the cash flows innovation than the low informed trader and uninformed traders. We found that the cash flow innovation influences the demand of informed trader. The market depth is a linear function of the demand of uninformed trader and weighted average of total variance error of information. Our finding supports previous research done by Spiegel and Subrahmanyam (1992).Our model shows that the more diverse the information, the higher the lambda coefficient which means the market becomes less liquid. The models consistent with Miller (1977) who found that the bigger the gap of private information is, the less liquid the market will be. If both informed traders have the same information they will demand the same amount of risky asset and it turns out to be similar as in the Kyle (1985) model.

scholarly journals MARKET DEPTH AND PRICE DYNAMICS: A NOTE

2004 ◽  
Vol 15 (07) ◽  
pp. 1005-1012 ◽  
Author(s):  
FRANK H. WESTERHOFF
Keyword(s):  
Trading Volume ◽  
Price Change ◽  
Empirical Studies ◽  
Price Impact ◽  
Price Dynamics ◽  
Trading Behavior ◽  
Price Fluctuations ◽  
Market Depth

This note explores the consequences of nonlinear price impact functions on price dynamics within the chartist–fundamentalist framework. Price impact functions may be nonlinear with respect to trading volume. As indicated by recent empirical studies, a given transaction may cause a large (small) price change if market depth is low (high). Simulations reveal that such a relationship may create endogenous complex price fluctuations even if the trading behavior of chartists and fundamentalists is linear.

scholarly journals The Information Content of Institutional Trades on the London Stock Exchange

2005 ◽  
Vol 40 (3) ◽  
pp. 621-644 ◽  
Author(s):  
Aslihan Bozcuk ◽  
M. Ameziane Lasfer
Keyword(s):  
Information Content ◽  
Stock Exchange ◽  
Price Impact ◽  
London Stock Exchange ◽  
Data Set ◽  
Fund Managers ◽  
Unique Data ◽  
Block Trades ◽  
Price Impacts ◽  
Limited Support

AbstractWe construct a unique data set that includes all reported institutional block trades on the London Stock Exchange and analyze the market reaction to buy and sell trades. We find that the type of investors behind the trade and the combination of the trade's size and the trader's resulting level of ownership are the major determinants of the information effects and the asymmetry between price impacts of buy and sell trades. In particular, large trades undertaken by fund managers, the most active investors in our sample, have strong information content, while, for the remaining trades, we report limited support for the information and the price impact asymmetry hypotheses. These results hold even after accounting for trade complexity and volatility effects in the regressions.

scholarly journals EXPRESS: Measuring the real-time stock market impact of firm-generated content

2021 ◽  
pp. 002224292110428
Author(s):  
Ewelina Lacka ◽  
D. Eric Boyd ◽  
Gbenga Ibikunle ◽  
P.K. Kannan
Keyword(s):  
Subject Matter ◽  
High Frequency ◽  
Stock Price ◽  
Price Impact ◽  
Negative Valence ◽  
Price Impacts ◽  
Competitor Orientation ◽  
Frequency Changes ◽  
The Impact

Firms increasingly follow an ‘always on’ philosophy, producing multiple pieces of firm-generated content (FGC) throughout the day. Current methodologies used in marketing are unsuited to unbiasedly capturing the impact of FGC disseminated intermittently throughout the day in stock markets characterized by ultra-high frequency trading. They also neither distinguish between the permanent (i.e. long-term) and temporary (i.e. short-term) price impacts nor identify FGC attributes capable of generating these price impacts. In this study, the authors define price impact as the impact on the variance of stock price. Employing a market microstructure approach to exploit the variance of high frequency changes in stock price the authors estimate the permanent and temporary price impacts of the firm-generated Twitter content of S&P 500 IT firms. The authors find that firm-generated tweets induce both permanent and temporary price impacts, which are linked to tweet attributes; valence and subject matter. Tweets reflecting only valence or subject matter concerning consumer or competitor orientation result in temporary price impacts, while those embodying both attributes generate permanent price impact; negative valence tweets about competitors generate the largest permanent price impacts. Building on these findings, the authors offer suggestions to marketing managers on the design of intraday FGC.

Treasury Market Functioning During the COVID-19 Outbreak: Evidence from Collateral Re-use

FEDS Notes ◽  
2020 ◽  
Vol 2020 (2755) ◽  
Author(s):  
Sebastian Infante ◽  
◽  
Zack Saravay ◽  
Keyword(s):  
Financial Markets ◽  
Sharp Increase ◽  
Price Impact ◽  
Severe Stress ◽  
Market Depth ◽  
Severe Impairment ◽  
Treasury Market ◽  
Bid Ask Spreads

In March 2020, uncertainty over the COVID-19 pandemic caused severe stress in U.S. financial markets. Specifically, Fleming and Ruela (2020) document a severe impairment of Treasury market functioning, as indicated by a sharp increase in bid/ask spreads, a decline in market depth, and an increase in price impact measures.

RESILIENT PRICE IMPACT OF TRADING AND THE COST OF ILLIQUIDITY

2013 ◽  
Vol 16 (06) ◽  
pp. 1350037 ◽  
Author(s):  
ALEXANDRE ROCH ◽  
H. METE SONER
Keyword(s):  
Price Impact ◽  
Maximization Problem ◽  
Order Book ◽  
Bid Ask Spread ◽  
Price Impacts ◽  
Liquidity Costs ◽  
Utility Maximization Problem ◽  
The Cost

We construct a model for liquidity risk and price impacts in a limit order book setting with depth, resilience and tightness. We derive a wealth equation and a characterization of illiquidity costs. We show that we can separate liquidity costs due to depth and resilience from those related to tightness, and obtain a reduced model in which proportional costs due to the bid-ask spread is removed. From this, we obtain conditions under which the model is arbitrage free. By considering the standard utility maximization problem, this also allows us to obtain a stochastic discount factor and an asset pricing formula which is consistent with empirical findings (e.g., Brennan and Subrahmanyam (1996); Amihud and Mendelson (1986)). Furthermore, we show that in limiting cases for some parameters of the model, we derive many existing liquidity models present in the arbitrage pricing literature, including Çetin et al. (2004) and Rogers and Singh (2010). This offers a classification of different types of liquidity costs in terms of the depth and resilience of prices.

Big Fish in Small Ponds: The Trading Behavior and Price Impact of Foreign Investors in Asian Emerging Equity Markets

2005 ◽  
Vol 40 (1) ◽  
pp. 1-27 ◽  
Author(s):  
Anthony Richards
Keyword(s):  
Emerging Markets ◽  
Equity Markets ◽  
Equity Returns ◽  
Price Impact ◽  
Trading Behavior ◽  
Foreign Investors ◽  
Portfolio Rebalancing ◽  
Price Impacts ◽  
New Findings ◽  
External Conditions

AbstractThis paper analyzes a new dataset for the aggregate daily trading of all foreign investors in six Asian emerging equity markets and provides two new findings. First, foreigners' flows into several markets show positive feedback trading with respect to global, as well as domestic, equity returns. The nature of this trading suggests it is due to behavioral factors or foreigners extracting information from recent returns, rather than portfolio rebalancing effects. Second, the price impacts associated with foreigners' trading are much larger than earlier estimates. The results suggest that foreign investors and external conditions have a larger impact on emerging markets than implied by previous work.

scholarly journals Augmenting Markets with Mechanisms

2020 ◽  
Author(s):  
Samuel Antill ◽  
Darrell Duffie
Keyword(s):  
Market Efficiency ◽  
Financial Market ◽  
Gains From Trade ◽  
Exchange Market ◽  
Market Depth ◽  
Price Impacts ◽  
The Common

Abstract We explain how the common practice of size-discovery trade detracts from overall financial market efficiency. At each of a series of size-discovery sessions, traders report their desired trades, generating allocations of the asset and cash that rely on the most recent exchange price. Traders can thus mitigate exchange price impacts by waiting for size-discovery sessions. This waiting causes socially costly delays in the rebalancing of asset positions across traders. As the frequency of size-discovery sessions is increased, exchange market depth is further lowered by the traders’ reduced incentive to bid aggressively on the exchange, further delaying the rebalancing of positions, and more than offsetting the gains from trade that occur at each of the size-discovery sessions.

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