Price impact of block trades: the curious case of downstairs trading in the EU emissions futures market

Using high-frequency data from the European Climate Exchange (ECX), we examine the determinants of price impact of €21 billion worth of block trades during 2008–2011 in the European carbon market. We find that wider bid-ask spreads and volatility are characterised by a smaller price impact. Larger levels of price impact are more likely to occur during the middle of the trading day, specifically the four-hour period between 11 a.m. and 3 p.m., than during the first or final hours. Purchase block trades induce a relatively smaller price impact on price run-up, while sell block trades exhibit a larger price impact on price run-up. We conclude that block trades on the ECX induce less price impact than in equity or conventional futures markets, and that a significant proportion of the effects contradict findings on block trades in those markets; thus, we provide the first evidence of the curious bent to block trading in the European Union emissions trading scheme.     

碳排放权市场价格发现功能的实证分析

碳期货市场在碳市场扮演着极为重要的角色,通常具有价格发现的功能。本文分析了国际碳排放权交易市场两种主要商品EUA、CER的期货价格关系．通过向量误差修正模型和公共因子模型对欧盟碳期货EUA与CER期货进行了实证研究。结果显示：EUA、CER这两种主要碳排价格指标之间具有很高的相关性,存在长期均衡的协整关系,均扮演着重要的价格发现角色,同时EUA期货价格引导CER期货价格变化。     

Asymmetric information and the bid-ask spread: an empirical comparison between automated order execution and open outcry auction

This study examines the components of the bid-ask spread on the Sydney Futures Exchange. The Exchange uses open outcry auction for daytime trading, and switches to a screen-based automated order execution system at 16:30 h for overnight trading. After controlling for proxies of order flow characteristics, the study finds that screen-based traders are more sensitive to market volatility than floor-based traders in setting the bid-ask spread. Spreads from floor trading have a smaller adverse information component but a larger order processing cost component relative to screen trading. The results suggest that floor traders can better assess the presence of adverse information than screen traders.     

City goes dark: Dark trading and adverse selection in aggregate markets

We investigate the impact of dark trading on adverse selection in an aggregate market for trading UK stocks. Dark trading is linked to lower adverse selection risk and improved informational efficiency and liquidity in the aggregate market, even as liquidity declines in the lit market with dark trading. However, there is a trading value-based threshold when dark trading starts to induce adverse selection. We estimate that this threshold varies from around 9% for the most liquid stocks to 25% for the least liquid stocks. The overall average threshold for the 288 FTSE 350 stocks in our sample is 14%.     

Order Imbalance and Its Impact on Market Performance: Order-driven vs. Quote-driven Markets

Abstract:  The behavior of order imbalance and its impact on market performance at the two Taiwan stock index futures markets, the TAIFEX and the SGX-DT, is investigated. The TAIFEX is an order-driven call market, while the SGX-DT uses a quote-driven continuous trading system. Our empirical results show that for the TAIFEX order-driven market, the spread is minimized when order imbalance is high. In contrast, for the SGX-DT quote-driven market, the spread is highest when order imbalance is high. For both markets, order imbalance has an impact on market liquidity and volatility. The impact is larger and more significant for SGX-DT futures. This suggests that the order-driven market mechanism of TAIFEX futures is superior in absorbing order imbalance and in reducing the resulting price impact.     

Liquidity in auction and specialist market structures: Evidence from the Italian bourse

Several studies find that bid-ask spreads for stocks listed on the NYSE are lower than for stocks listed on NASDAQ. While this suggests that specialist market structures provide greater liquidity than competing dealer markets, the nature of trading on the NYSE, which comprises a specialist competing with limit order flow, obfuscates the comparison. In 2001, a structural change was implemented on the Italian Bourse. Many stocks that traded in an auction market switched to a specialist market, where the specialist controls order flow. Results confirm that liquidity is significantly improved when stocks commence trading in the specialist market. Analysis of the components of the bid-ask spread reveal that the adverse selection component of the spread is significantly reduced. This evidence suggests that specialist market structures provide greater liquidity to market participants.     

Liquidity and market efficiency: A large sample study

Chordia et al. (2008, hereafter CRS) examine short horizon return predictability from past order flows of large, actively traded NYSE firms across three tick size regimes and conclude that higher liquidity facilitates arbitrage trading which enhances market efficiency. We extend CRS to a comprehensive sample of all NYSE firms and examine the dynamics between liquidity and market efficiency during informational periods. Our results indicate that although all NYSE firms experience an overall improvement in market efficiency across periods of different tick size regimes, this improvement varies significantly across the portfolios of sample companies formed on the basis of trading frequency, market capitalization, and trading volume. After controlling for these factors, we further document a positive association between a continuous measure of liquidity and market efficiency, and show that this effect is amplified during periods that contain new information, as reflected in high adverse selection component of the bid-ask spread.     

Is faster or slower trading better? An examination of order type execution speed and costs

We examine order type execution speed and costs for US equity traders. Marketable orders that execute slower exhibit lower execution costs. Those who remove liquidity faster and pay higher trading costs transact in smaller size, spread trading across more venues, take more liquidity, and are better informed. Nonmarketable limit orders that execute slower exhibit greater adverse selection; and larger, uninformed traders who concentrate their trading in fewer venues submit them. Our findings suggest that slowing down the trading process, when faster options exist, can benefit certain market participants who seek to cross the bid–ask spread.     

BID-ASK SPREAD COMPONENTS IN AN ORDER-DRIVEN ENVIRONMENT

The purpose of this study is to extend the bid-ask spread decomposition literature into the order-driven environment. The use of electronic limit order books, combined with order-driven market making, has been increasing rapidly in recent years because of improvements in information technology and financial market deregulation. To date, reported bid-ask spread decompositions rely almost exclusively on quote-driven or hybrid systems. This study provides bid-ask spread component estimates from one of the world's largest order-driven markets, the Stock Exchange of Hong Kong. Based on a sample of over six million observations, we estimate a median adverse selection component of 33 percent and a median order processing component of 45 percent of the spread. Dollar-volume-based decile portfolios show significant cross-sectional variation for adverse selection costs but insignificant variation for order processing costs. Finally, order persistence is consistently positive for all deciles and displays a direct relation with the level of trading activity.     

Market Quote and Spread Component Cost Behavior Around Trading Halts for Stocks Interlisted on the Montreal and Toronto Stock Exchanges

We use intraday quotes and transactions on halted securities that interlisted on the Toronto Stock Exchange and Montreal Exchange to decompose the spreads and examine quote depths. Our results show that order‐processing costs differ for trading halts at the open compared to halts during the rest of the trading day. We find that the adverse‐selection cost component of the spread is higher around trading halts and highest at the trading halt. We also find that print‐media articles that appear within the four‐day window centered on the halt have no impact on the time‐series behavior of the spread cost.     

Trade size clustering and the cost of trading at the London Stock Exchange

For the London Stock Exchange, this paper investigates differences in trading costs between market maker (off-book) and order book trades, in the context of clustering in trade sizes and prices. We report several substantial findings. Even after controlling for differences in trade size, the realised spread measure is lower for off-book trades. For the order book, trade size clustering is not associated with differences in transaction costs nor with differences in the information content of trades. For the off-book market, trades in clustered (popular) sizes carry significantly more information than non-clustered trades. Despite the significant differences in the price impact estimates between the order book and off-book, we show that traders placing large orders off-book are still better off than trading via the order book as they benefit from a large discount from the current midpoint price. Additionally, we highlight that price and size clustering tend to occur simultaneously rather than being substitutes in this market setting.     

证券交易的透明度与信息揭示制度：理论综述

证券交易过程中，交易信息的发布、扩散和传递方式对于各类市场参与者非常重要。目前关于信息揭示制度和交易透明度对市场运行效果的影响尚存在许多争议。本文讨论了交易透明度的含义、研究者和市场机构对于交易透明度的争论、交易透明度与市场绩效的关系，以及不同交易透明性的市场之间的竞争等问题，系统总结了目前与证券交易透明度和交易信息揭示有关的理论观点，以期把握交易信息揭示程度对市场产生的影响，以及由此引起的交易透明度对市场的运行效率产生的影响。     

Public information arrival: Price discovery and liquidity in electronic limit order markets

How information is translated into market prices is still an open question. This paper studies the impact of newswire messages on intraday price discovery, liquidity, and trading intensity in an electronic limit order market. We take an objective ex ante measure of the tone of a message to study the impacts of positive, negative, and neutral messages on price discovery and trading activity. As expected, we find higher adverse selection costs around the arrival of newswire messages. Negative messages are associated with higher adverse selection costs than positive or neutral messages. Liquidity increases around positive and neutral messages and decreases around negative messages. Available order book depth as well as the trading intensity increases around all news. Our results suggest that market participants possess different information gathering and processing capabilities and that negative news messages are particularly informative and induce stronger market reactions.     

Quote setting and price formation in an order driven market

This paper models quote setting and price formation in a non-intermediated, order driven market where trading occurs because investors differ in their share valuations and the advent of news that is not common knowledge, and tests the model using transaction data on individual stocks in the ParisBourse CAC40 index. As an extension of Foucault (1999), we show that the size of the spread is a function of the differences in valuation among investors and of adverse selection. Both GMM estimation of the model parameters and empirical evidence on spread behavior as the relative proportion of buyers and sellers in the market changes, provide strong support for the model. Our analysis yields further insight into the dynamic process of price formation and into the market clearing process in an order driven market.     

The self-financing equation in limit order book markets

The goal of this paper is to present a mathematical framework for trading on a limit order book, including its associated transaction costs, and to propose continuous-time equations which generalise the self-financing relationships of frictionless markets. These equations naturally differentiate between trading via limit and via market orders, as they include a price impact or adverse selection constraint. We briefly mention several possible applications, including hedging European options with limit orders, to illustrate their impact and how they can be used to the benefit of low-frequency traders. Two appendices include empirical evidence for facts which are not universally recognised in the current literature on the subject.

     

The navigation of an iceberg: The optimal use of hidden orders

Market participants with large orders to execute are often reluctant to expose these to an open order book in their entirety in order to avoid a potential adverse market impact. Therefore, investors often split large orders into smaller tranches. Iceberg orders facilitate these trading practices by executing such business automatically in the order book. This article analyzes the rationale for the use of iceberg orders by assessing the costs and benefits of this trading instrument.     

Third Market Broker-Dealers: Cost Competitors or Cream Skimmers?

This article compares the bid-ask spread for New York Stock Exchange (NYSE)-listed securities before and after a major third market broker-dealer, Bernard L. Madoff Investment Securities (Madoff), begins to selectively purchase and execute orders in those securities. Tests reveal the quoted bid-ask spread tightens when Madoff enters the market. Furthermore, trading costs as measured by the difference between the transaction price and the midpoint of the contemporaneous bid-ask spread do not increase. Together, these results suggest that the adverse selection problem associated with allowing agents to selectively execute orders in exchange-listed securities may be economically insignificant.     

The total cost of trading Belgian shares: Brussels versus London

Since 1990, London’s SEAQ International (SEAQ-I) has attracted considerable trading volume in Belgian equities. This paper investigates competition between the Brussels CATS market and London’s SEAQ-I. Toward this end, we gathered extensive limit order book data as well as transactions and quotation information. With regard to liquidity (indirect costs), measured by the quoted and effective bid–ask spread, the paper concludes that CATS outperforms SEAQ International for both measures. The effective spread is of course substantially smaller than the quoted spread, with the CATS effective spread showing a U-shaped form. This paper, unique in employing an extensive data set that includes all hidden orders and the whole limit order book, produces results in line with the different market microstructure models. Total trading costs on CATS are lower (higher) for small (large) trade sizes.     

Liquidity Provision and Noise Trading: Evidence from the "Investment Dartboard" Column

How does increased noise trading affect market liquidity and trading costs? We use The Wall Street Journal's “Investment Dartboard” column, which stimulates noise trading, as a natural experiment to evaluate models of the bid-ask spread. We find that substantial increases in trading volume and significant but temporary abnormal returns occur when analysts recommend stocks in this column, especially when recommendations come from analysts with successful contest track records. We also find an increase in liquidity and a decrease in the adverse selection component of the bid-ask spread.     

Market makers as information providers: The natural experiment of STAR

Market makers are financial intermediaries who are supposed to provide additional liquidity, but do not have any information-related obligation. This paper studies the unique case of the Italian Stock Exchange, where market makers are also obliged to facilitate information disclosure about the firms they cover. We focus on a group of small/medium capitalization stocks (STAR) that are assigned a designated market maker (DMM) starting from 2001. We show that their liquidity requirements are not binding during the sample periods and that the main impact of DMMs' introduction is due to their obligations on information provision. We find that DMMs' activity as information providers reduces spread and price volatility, the probability of informed trading (PIN), and the adverse selection component of the spread. An event study provides evidence that the information released through DMMs is perceived as useful by market participants.