The Central Bank Shift to Market Maker of Last Resort: The Unintended Consequences of Unconventional Monetary Policies

We analyze the transition of central banks from lenders to market makers of last resort. The adoption of unconventional monetary policies characterizes this transition. In their new role as market makers, central banks engage in the latter by extending and reinforcing interventions in other markets than the traditional bank reserves market. We then explain that the difference between the two roles is one of degree rather than kind. In both cases, the prevention of liquidity shortages is a primary concern. As conventional policies become inadequate, central banks resort to unconventional policies to escape a general liquidity shortage at the zero lower bound. However, these unconventional policies do not solve the structural problems in financial and real markets. Both conventional and unconventional monetary policies cause price distortions, in particular on asset markets. The policies of the market maker of last resort prevent necessary readjustments of cyclical divergences between real and financial markets.

Modelamiento para la estimación del precio de cuotas de fondos de inversión de renta fija chilena en base a las tasas de mercado: Una metodología lineal y una no lineal

Este estudio aborda la problemática que enfrentan los corredores de bolsa chilenos que actúan bajo la figura de market maker de cuotas de fondos de inversión de renta fija local cuando deben determinar los precios de compra y venta que se ofrecen en el mercado por estos instrumentos. Como solución, se propone un modelo matemático basado en el último valor cuota conocido y en la fluctuación diaria de la tasa de referencia del mercado de renta fija, bonos del Banco Central de Chile en unidades de fomento a 5 años (BCU 5). Los resultados obtenidos demuestran una clara mejoría en cuanto a las estimaciones que entrega el modelo propuesto, comparado con la utilización de la última información disponible en el mercado para determinar el precio de las cuotas.

Dynamic Learning and Market Making in Spread Betting Markets with Informed Bettors

How Bookies Can Outwit Sophisticated Bettors Sports-betting markets are based entirely on predictions. A bettor has to pick a winning contestant, and a market maker―a bookie―bets on the opponent. As bookies have to take the other side of every bet, it is of great value to understand the market making problem, that is, how to set the spread lines as “prices” for the bookies. Nevertheless, understanding of this problem is limited. Specifically, sophisticated bettors exist in the market, and a bookie can be manipulated by skillful bettors because of information asymmetry. In “Dynamic Learning and Market Making in Spread Betting Markets with Informed Bettors,” Birge, Feng, Keskin, and Schultz study the market-making problem under information asymmetry and market manipulation. They show that, although many popular learning and pricing algorithms, such as Bayesian policies, are effective in learning, they are vulnerable to strategic manipulations. The authors propose a dynamic learning and pricing algorithm, called the inertial policy, that collects information from the market effectively but also protects the bookie from strategic manipulations.

HERDING BEHAVIOR: MENGEKSPLORASI SISI ANALISIS BROKER SUMMARY

<p><strong><em>Abstract</em></strong><em>: Our research focuses on herding behavior and broker summary analysis in the Covid-19 time frame in Indonesia. Herding behavior in the retail exchange community or the general public is considered detrimental due to the irrationality of analysis and promoting euphoria which results in very large losses. Answering the research gap, we offer a broad exploration concept to avoid and create positive returns by utilizing the herding behavior of the retail market community. We tested using multiple methods to ensure the existence of herding behavior in a regression setting of two and took advantage of positive opportunistic returns for exchange play. The first method shows that the research sample detected herding behavior during March 11, 2020 – March 11, 202 and we ensure the resilience of existence through two models. The second method, to get a positive return, we offer bandarmology analysis adopted from Dow theory for trading in a market maker style. Analyzing the movement and following market makers, we can conclude that it creates positive returns and prevents the stock exchange community from the impact of sustainable auto rejects. This study has limitations, for future research we expect the use of empirical models that are simpler and more efficient in revealing herding behavior. Furthermore, for the exploratory method, further research can be carried out in disclosing bandarmology analysis based on stock categorization (blue chip, second liner, and third liner), time horizon of market makers, and detailed analysis of camouflage behavior of market makers using retail securities.</em></p><p><strong><em>Keywords</em></strong><em>: bandarmology</em><em>;</em><em> brokers summary;</em><em> </em><em>herding behavior; market makers </em></p>

The impact of MILA market-maker facility on volatility of the Colombian stock market

ABSTRACT In 2014, the Colombian Stock Exchange commenced the implementation of its market-maker facility (MMF), aiming at improving market efficiency. This paper examines the impact of the MMF program on three volatility-related aspects: volatility persistence, risk premium, and information asymmetry. This paper provides new insights about the anticipated outcomes of Mercados Integrados Latinoamericanos (MILA) reforms, specifically the MMF on the volatility of the Colombian stock market. This topic has not been fully addressed in the existing literature. This study, therefore, provides useful information for regulators and policy makers, in endeavors to address key issues raised during the World Economic Forum (WEF) of 2016. This paper poses a challenge to policy makers and stock market regulators in Colombia to revisit the reform program and address the factors limiting the effectiveness of market reforms. This paper provides justification for replicating the study to cover other MILA countries due to existing differences in some domestic market policies and structures. The paper employs conditional variance models for measuring volatility persistence, risk premia, and information asymmetry. The models are employed on the COLCAP stock index (Colombia) observed from January 17, 2008 to May 30, 2019. Observations are divided into two samples - pre- and post-MMF. This paper provides evidence of the impacts of the MMF reforms in the Colombian stock market. Specifically, the MMF seems to have an impact on the following aspects: (i) the magnitude in which current returns depend on previous returns has increased; (ii) investment portfolio returns, which are generally low, have declined after the MMF, leading to less risk compensation; (iii) the MMF does not seem to have affected the volatility of market returns and information asymmetry; (iv) volatility persistence increased in magnitude.

O efeito da introdução de market makers na liquidez das ações: evidências no mercado acionário brasileiro

Objetivo: Este estudo teve por objetivo analisar se a introdução de market makers nas negociações das ações de empresas brasileiras listadas na bolsa de valores brasileira, é uma medida válida para a elevação da liquidez de mercado desses ativos. Metodologia: Foi realizado o teste de quebra estrutural de Chow nas séries temporais das proxies de liquidez spread médio, índice turnover e volume financeiro, em uma amostra de 55 ativos. Optou-se por considerar dados na janela de 260 dias antes e 260 dias após o início da atuação do market maker, por representar o número aproximado de pregões em um ano, e por evitar conclusões errôneas devido à volatilidade do mercado brasileiro. Resultados: Os resultados evidenciaram que após a introdução dos market makers e considerado um nível de confiança de 99%, 67% dos ativos estudados tiveram mudanças abruptas e estatisticamente significativas no spread médio, 47% apresentaram mudanças abruptas no turnover e 60% tiveram mudanças no volume de negociação. Flexibilizando o nível de confiança para 95%, 76% dos ativos estudados apresentaram mudanças abruptas no spread médio, 65% tiveram mudanças no turnover e 69% apresentaram mudanças no volume de negociações. Ao nível de confiança de 90%, os resultados encontrados foram de 85% dos ativos apresentando mudanças abruptas no spread médio, 78% apresentando mudanças no turnover e 73% apresentando mudanças abruptas e estatisticamente significativas no volume negociado. Contribuições do Estudo: Esse quadro fornece portanto, fortes evidências sobre a atuação dos market makers e a influência que esses agentes exercem na liquidez de mercado dos ativos negociados pela bolsa de valores brasileira, ao demostrar que, a sua contratação pode aumentar a liquidez e contribuir de forma significativa com as negociações dos ativos.

Insider Trading, Competition, and Real Activities Manipulation

We consider a setting where managers manipulate the firms’ real activities in anticipation of insider trading opportunities. Managers choose strictly higher production quantities than the quantities chosen absent insider trading, implying lower firm profit but higher consumer surplus. Through comparative statics, we show the overproduction is mitigated by the degree of competition in the industry, the manager’s current equity stake in the firm, and the precision of cost information. We also analyze the effects of insider trading in several extensions including asymmetric ownership structure, potential horizontal merger, and common market maker. This paper was accepted by Shiva Rajgopal, accounting.