Strategic Behavior and Underpricing in Uniform Price Auctions: Evidence from Finnish Treasury Auctions

We contribute to the debate on the optimal design of multiunit auctions by developing and testing robust implications of the leading theory of uniform price auctions on the bid distributions submitted by individual bidders. The theory, which emphasizes market power, has little support in a data set of Finnish Treasury auctions. A reason may be that the Treasury acts strategically by determining supply after observing bids, apparently treating the auctions as a repeated game between itself and primary dealers. Bidder behavior and underpricing react to the volatility of bond returns in a way that suggests bidders adjust for the winner's curse.     

THE DEALERS' PRICE/SIZE QUOTE AND MARKET LIQUIDITY

We model trading in a competitive securities market where informed traders and liquidity traders transact with dealers. The dealers' entire published quote is modeled: bid-ask prices and the number of shares the dealer is willing to buy/sell at these prices (i.e., size quotes). We argue that size quotes are a more informative indicator of market liquidity than the bid-ask spread's adverse-selection component. Moreover, the size quotes reveal several market characteristics that cannot be inferred from the bid-ask spread's adverse-selection component alone. The model generates a number of empirically testable predictions that clarify certain key elements of market liquidity.     

INFORMED TRADING RISK AND BID-ASK SPREAD CHANGES AROUND OPEN MARKET STOCK REPURCHASES IN THE NASDAQ MARKET

Microstructure theory contends that dealers' bid-ask spreads should vary intertemporally with changes in the asymmetric information component of the spread. Corporate theory suggests that stock repurchase announcements signal management's private information to the securities markets. An examination of dealers' spread behavior around firms' open market repurchases in the NASDAQ market reveals a decline in spreads adjusted for dealers' inventory-holding and order-processing costs. This decline is attributed to a reduction in informed trading risk associated with the open market repurchase announcements.     

How Are Firms Sold?

As measured by the number of bidders that publicly attempt to acquire a target, the takeover arena in the 1990s appears noncompetitive. However, we provide novel data on the pre‐public, private takeover process that indicates that public takeover activity is only the tip of the iceberg of actual takeover competition during the 1990s. We show a highly competitive market where half of the targets are auctioned among multiple bidders, while the remainder negotiate with a single bidder. In event study analysis, we find that the wealth effects for target shareholders are comparable in auctions and negotiations.     

DO DEALERS INFER INFORMATION FROM ORDER FLOW?

I examine strategic behavior among dealers in the NASDAQ market and document that there is a lead quote‐setting dealer in each security and that the quotes posted by this leader are informative. Other dealers free‐ride this information by following the lead quote‐setting dealer. The lead dealer can be identified by two information signals: (1) percentage of time spent on the inside market (i.e., posting inside quotes), and (2) trade volume transacted. Dealers that free‐ride the leader's quotes quickly update their posted quotes in the same direction as the leader's quote change. My findings suggest that directing trade to the lead dealer may be more advantageous than randomly routing trade.     

Sizing Up Repo

To understand which short‐term debt markets experienced “runs” during the financial crisis, we analyze a novel data set of repurchase agreements (repo), that is, loans between nonbank cash lenders and dealer banks collateralized with securities. Consistent with a run, repo volume backed by private asset‐backed securities falls to near zero in the crisis. However, the reduction is only $182 billion, which is small relative to the stock of private asset‐backed securities as well as the contraction in asset‐backed commercial paper. While the repo contraction is small in aggregate, it disproportionately affected a few dealer banks.     

PRICE AND QUANTITY QUOTES ON NASDAQ: A STUDY OF DEALER QUOTATION BEHAVIOR

We show that the majority of quotes posted by NASDAQ dealers are noncompetitive and only 19.5% (18.4%) of bid (ask) quotes are at the inside. The percentage of dealer quotes that are at the inside is higher for stocks with wider spreads, fewer market makers, and more frequent trading, and lower for stocks with larger trade sizes and higher return volatility. These results support our conjecture that dealers have greater incentives to be at the inside for stocks with larger market‐making revenues and smaller costs. Dealers post large depths when their quotes are at the inside and frequently quote the minimum required depth when they are not at the inside. The latter quotation behavior leads to the negative intertemporal correlation between dealer spread and depth.     

The Dynamics of Dealer Markets Under Competition

The behavior of competing dealers in securities markets is analyzed. Securities are characterized by stochastic returns and stochastic transactions. Reservation bid and ask prices of dealers are derived under alternative assumptions about the degree to which transactions are correlated across stocks at a given time and over time in a given stock. The conditions for interdealer trading are specified, and the equilibrium distribution of dealer inventories and the equilibrium market spread are derived. Implications for the structure of securities markets are examined.     

Interest rate variability,government securities dealers,and the stability of financial markets

Monetarists argue that monetary policy should focus on controlling monetary growth rather than interest rates. Arguments to smooth rates at the expense of stabilizing monetary growth frequently emphasize the adverse effects of rate variability on financial markets. Assuming that financial market performance can be correctly inferred from dealer positions and spreads, this paper estimates the parameters of a model that allows for both short- and long-term effects of rate variability on dealer positions and spreads. Estimates of variability effects on government securities dealer positions and spreads provide little support for limiting variability to maintain or improve market performance because most of the adverse effects of variability are temporary.     

Properties of scoring auctions

This article studies scoring auctions, a procedure commonly used to buy differentiated products: suppliers submit offers on all dimensions of the good (price, level of nonmonetary attributes), and these are evaluated using a scoring rule. We provide a systematic analysis of equilibrium behavior in scoring auctions when suppliers' private information is multidimensional (characterization of equilibrium behavior and expected utility equivalence). In addition, we show that scoring auctions dominate several other commonly used procedures for buying differentiated products, including menu auctions, beauty contests, and price‐only auctions with minimum quality thresholds.     

Quote revision and information flow among foreign exchange dealers

In a multi-dealer market without transaction disclosure, quote revision partially reveals the posting dealer's private information/belief and may have an impact on other dealers’ pricing decision. Using continuous quotes from three major dealers in the interbank foreign exchange market, I find significant information externality from one dealer's quotes to others. The information content of quote revision is positively related to the overall order flow to the market, as opposed to order flow to the posting dealer. At 15-min interval or above, public information becomes the dominant component that drives quote revision. Furthermore, public information appears to induce positive serial correlation and private information causes negative serial correlation in short-term quote revision.     

Does internalization diminish the impact of quote aggressiveness on dealer market share?

We analyze data provided by NASDAQ to examine how quote aggressiveness affects dealer market share and whether the practice of internalization mitigates the impact of quote aggressiveness. Our empirical results show that although internalization does not reduce the impact of price aggressiveness on dealer market share, it mitigates the impact of size aggressiveness. This result suggests that although internalization may not affect the dealer's incentive to post aggressive prices, it may reduce the incentive to post large depths. We find that aggressive quotes are more effective in raising dealer market share in stocks with a less competitive (more concentrated) market structure. Our results also show that the effective spread is wider (narrower) for stocks with a smaller price (size) elasticity of dealer market share.     

Repo Auctions and the Market for Liquidity

What is the nature of imperfections in the market for liquidity? Studying bidder level data from European Central Bank (ECB) repo auctions, we find that this market appears to be informationally efficient in the sense that participants do not have private information about future short‐term rates. However, auction allocations affect banks' subsequent behavior in a way that is consistent with a degree of allocational and operational inefficiency. Also, large bidders appear to have better access to the interbank market than small ones. Finally, the evidence suggests that the ECB uses collateral haircuts that do not equilibrate opportunity costs.     

Dealer attention,the speed of quote adjustment to information,and net dealer revenue

Using trade and quote data from the NYSE, we examine the relation between dealer attention, dealer revenue, and the probability of informed trade. We find that dealer revenue net of losses to better-informed traders in NYSE stocks is positively related to the speed at which quotes adjust to full information levels. The speed of quote adjustment is faster for stocks with greater dealer attention, as measured by a stock’s relative prominence at its post and panel location on the NYSE floor. The level of dealer attention in turn is positively related to a stock’s probability of information-based trading. The results are consistent with a theoretical model we derive in which dealers trade multiple securities and must optimally allocate their limited attention to monitoring order flow to minimize losses to better-informed traders.     

Do investors prefer round stock prices? Evidence from Israeli IPO auctions

We find round number clustering in orders submitted by investors in Israeli IPO auctions. Explanations offered for price clustering, such as dealer collusion or implicit agreement to simplify negotiations, cannot explain price clustering in this market. Therefore, this is direct evidence that investors prefer round numbers.     

The Cost of Deposit Insurance for Privately Held Banks: A Market Comparable Approach

Previous empirical studies that use an option pricing model to estimate deposit insurance costs have been limited to banks that issue publicly traded securities: a bank's security prices are used to infer its risk characteristics. However, if deposit insurance costs are needed for privately held banks, as would be the case under a system of risk-based insurance premiums, then an alternative method is required. This paper presents a “market comparable” approach for valuing private banks' deposit insurance. The approach first uses information on public depository institutions to identify the statistical relationships between a bank's supervisory accounting data and its risk characteristics derived from equity market data. Second, it uses these relationships to predict the risk characteristics of a private depository institution based on its supervisory accounting data. This approach is applied to over 7000 private banks and thrifts to estimate their risk characteristics and their implied risk-neutral and physical probabilities of insolvency. For the vast majority of institutions, these risk characteristics and insolvency probabilities are within a reasonable range.     

基于MF-DCCA方法的证券市场间交叉相关性研究

运用多重分形去趋势波动交叉相关分析法(MF-DCCA),考量上海证券市场和香港证券市场之间的交叉相关关系。实证表明：上海证券市场和香港证券市场之间存在交叉相关性,且呈现出多重分形特征;当证券市场出现较大的波动时,上海证券市场和香港证券市场的交叉标度指数要大于其平均标度指数,即两个证券市场之间的交叉相关性要大于其自相关性。     

MARKET STRUCTURE AND REPORTED TRADING VOLUME: NASDAQ VERSUS THE NYSE

Trading volume for common stocks is of interest to financial economists, investors, and securities lawyers. NASDAQ is a dealer market where trades with dealers are included in reported trading volume. This procedure does not accurately measure the trading volume by public buyers and sellers. Trading volume reported on the NYSE, which is primarily an auction market, provides a much closer measure of trades by public investors. We examine a sample of firms whose stock traded on the NASDAQ/NMS and subsequently on the NYSE. When trading switches to the NYSE, the firms' trading volume drops to about 50 percent of the volume previously reported on NASDAQ. A control group of firms that switched from the AMEX to the NYSE shows a small, but statistically insignificant, increase in trading volume.     

Do Qualified Foreign Institutional Investors Herd in Taiwan's Securities Market?

This paper investigates whether and why qualified foreign institutional investors (QFIIs) in Taiwan herd when picking stocks. The evidence shows that QFIIs herd in Taiwan's securities market: They follow each other into and out of the same securities. We identify how the herding behavior forms and how it changes over time. The results suggest that there is an industry effect when QFIIs pick up stocks. They herd on securities classified in specific industries and also prefer stocks with high past returns as well as large firm size, supporting the argument that QFIIs are momentum traders. Characteristic herding and investigative herding explain QFIIs' trading behavior in Taiwan.     

Market structure, informational efficiency and liquidity: An experimental comparison of auction and dealer markets

We report the results of 18 market experiments that were conducted in order to compare the call market, the continuous auction and the dealer market. Transaction prices in the call and continuous auction markets are much more efficient than prices in the dealer markets. The call market shows a tendency towards underreaction to new information. Execution costs are lowest in the call market and highest in the dealer market. The trading volume and Roll's (Journal of Finance (1984) 1127–1139) serial covariance estimator are inappropriate measures of execution costs in the present context. The relation between private signals, trading decisions and trading profits is analyzed.