Competition in the stock market with asymmetric information

We build a game theoretical model to examine how the level of information advantage of insiders and the competition between insiders and sophisticated investors affect stock price movements and traders’ trading strategies and profits. We show that the competition between insiders and sophisticated investors can reduce the losses of less sophisticated investors, and thus alleviates the disadvantaged position of the less sophisticated investors. Further, traders’ profits are affected by the accuracy of insiders’ private information, and the number of days that insiders have obtained the information in advance. These findings show the importance of information transparency and the role of sophisticated investors in limiting insiders’ trading advantages and mitigating the expropriation of investors by insiders.     

Liquidity,information, strategic trading in an electronic order book: New insights from the European carbon markets

The electronic limit order book (LOB hereafter) has rapidly become the primary way of trading European carbon assets over the 4 years of the EU ETS programme (2008–2012). In this first attempt of examining the informational content of an electronic order book, we evidence that order flow imbalances have a moderate capacity to predict short term price changes. However, we find that both LOB slope and immediacy costs help to forecast quote improvements and volatility in the next 30 min. Further, we explain why informed trading is highly influential and show that it consists in mixing order splitting strategies and posting fleeting orders once the asymmetric information is reduced (Rosu, 2009). Overall, the consolidated status of the order book mirrors a high level of market uncertainty and a low degree of informational efficiency. In this way, strategic trading can in itself explain some of order book properties, independently of the degree of traders’ sophistication and market competition.     

The rise and fall of technical trading rule success

The purpose of this paper is to examine the performance of an important set of momentum-based technical trading rules (TTRs) applied to all members of the Dow Jones Industrial Average (DJIA) stock index over the period 1928–2012. Using a set of econometric models that permit time-variation in risk-adjusted returns to TTR portfolios, the results reveal that profits evolve slowly over time, are confined to particular episodes primarily from the mid-1960s to mid-1980s, and rely on the ability of investors to short-sell stocks. These findings are demonstrated to be consistent with theoretical models that predict a relationship between TTR performance and market conditions.     

Masculinity,Testosterone, and Financial Misreporting

We examine the relation between a measure of male CEOs’ facial masculinity and financial misreporting. Facial masculinity is associated with a complex of masculine behaviors (including aggression, egocentrism, riskseeking, and maintenance of social status) in males. One possible mechanism for this relation is that the hormone testosterone influences both behavior and the development of the face shape. We document a positive association between CEO facial masculinity and various misreporting proxies in a broad sample of S&P1500 firms during 1996–2010. We complement this evidence by documenting that a CEO's facial masculinity predicts his firm's likelihood of being subject to an SEC enforcement action. We also show that an executive's facial masculinity is associated with the likelihood of the SEC naming him as a perpetrator. We find that facial masculinity is not a measure of overconfidence. Finally, we demonstrate that facial masculinity also predicts the incidence of insider trading and option backdating.     

Multi-party computation mechanism for anonymous equity block trading: A secure implementation of turquoise plato uncross

Dark pools are financial trading venues where orders are entered and matched in secret so that no order information is leaked. By preventing information leakage, dark pools offer the opportunity for large volume block traders to avoid the costly effects of market impact. However, dark pool operators have been known to abuse their privileged access to order information. To address this issue, we introduce a provably secure multi-party computation mechanism that prevents an operator from accessing and misusing order information. Specifically, we implement a secure emulation of Turquoise Plato Uncross, Europe's largest dark pool trading mechanism, and demonstrate that it can handle real world trading throughput, with guaranteed information integrity.     

Informed trading around earnings and mutual fund alphas

We examine whether informed trading around earnings announcements drives mutual fund performance. The measure is motivated by prior studies arguing that a mutual fund is skilled if it buys stocks with subsequent high earnings announcement returns. We find that this measure predicts future mutual fund returns. On average, after adjusting for Carhart’s four risk factors, the top decile of mutual funds outperforms the bottom decile by 44 basis points per quarter. By decomposing fund alphas into two components in their relations to earnings, we find that this measure is only associated with earnings-related fund alphas. This measure can also be used to predict stock returns at future earnings announcements.     

Trade Size Preference of Informed Traders in Indian Equity Markets

This study utilized high frequency transactions data to analyze the trade size preference of informed traders in Indian equity markets. It is observed that informed traders at an aggregate level adopt stealth trading strategy, wherein they prefer medium sized trades over large sized trades in order to camouflage their private information. However, the stealth trading behavior varies across stocks, wherein informed traders prefer more large sized trades on firms that are part of an index compared to non-index firms. Trading behavior also varies across other market conditions. It has been noted that informed traders prefer large sized trades during periods of high market thickness, negative returns, and low volatility. This study also provides a rationale for such varied behavior of informed traders.     

Corporate Governance and Corporate Bond Liquidity

Using a unique dataset of corporate bond trading information and corporate governance evaluation scores, this study examines the determinants of corporate bond market liquidity in Korea. In particular, this study explores whether corporate governance performance of a company influences liquidity of bonds issued by the company. The paper reports three important findings. First, the issue size and age of bond are important determinants of bond liquidity. Second, liquidity of corporate bonds is influenced by changes in macroeconomic conditions. Third, and most importantly, better corporate governance increases liquidity of corporate bonds. This result suggests that corporate governance is an important determinant of bond liquidity, as it lowers transaction costs by improving transparency and reducing asymmetry of information. This paper contributes to the literature by providing new evidence that corporate governance performance is an important determinant of liquidity in corporate bond markets.     

Optimal order display in limit order markets with liquidity competition

Order display is associated with benefits and costs. Benefits arise from increased execution-priority, while costs are due to adverse market impact. We analyze a structural model of optimal order placement that captures trade-off between the costs and benefits of order display. For a benchmark model of pure liquidity competition, we give a closed-form solution for optimal display sizes. We show that competition in liquidity supply incentivizes the use of hidden orders to prevent losses due to over-bidding. Thus, because aggressive liquidity competition is more prevalent in liquid stocks, our model predicts that the proportion of hidden liquidity is higher in liquid markets. Our theoretical considerations ares supported by an empirical analysis using high-frequency order-message data from NASDAQ. We find that there are no benefits in hiding orders in il-liquid stocks, whereas the performance gains can be significant in liquid stocks.     

Organizational Design,Competition, and Financial Exchanges

We investigate the incentives for vertical and horizontal integration in the financial securities service industry. In a model with two exchanges and two central securities depositories (CSDs), we find that decentralized decisions might lead to privately and socially inferior industry equilibria with vertical integration of both CSDs with their respective exchanges. Allowing for horizontal integration of CSDs avoids privately inferior industry equilibria. However, we observe too little horizontal integration from the social perspective. We link our results to recent regulatory and institutional developments such as the emergence of multilateral trading facilities, over-the-counter regulation, and financial harmonization.