Dancing in the dark: post-trade anonymity,liquidity and informed trading

We analyze the impact of post-trade anonymity on liquidity and informed trading in an order driven stock market. The German stock market introduced the Central Counterparty (CCP) in March 2003 for German equities traded on its anonymous electronic trading platform Xetra leading to a major change in its existing transparency regime. Before the introduction trader IDs were revealed to the counterparties of a trade, with the introduction of the CCP even after the transaction the traders remain anonymous. Previous theoretical and empirical research documents that pre-trade anonymity results in increased liquidity, while results on post-trade anonymity are mixed. We find a significant increase in liquidity measured through a reduction of 25% in implicit transaction costs. We also document that the arrival rate of informed traders is reduced in the anonymous setting. Following recent findings of Bloomfield et al. (J Finan Econ 75:165–199, 2005) that informed traders take on the role of liquidity providers we interpret our findings as indication that informed traders change their behavior in providing liquidity more aggressively in an anonymous environment.     

Limit order book,anonymity and market liquidity: evidence from the Sydney Futures Exchange

This study examines the impact of the removal of broker mnemonics on the Sydney Futures Exchange. Early research finds that a decrease in transparency reduces liquidity in the market, whereas more recent research finds that reduced transparency improves market quality. Results of the present study indicate an improvement in liquidity after the removal of broker mnemonics. There is a significant increase in quoted depth and trading volume, and a significant decrease in quoted spreads in the 90 day Bank Accepted Bill, 3 year Treasury Bond and 10 year Treasury Bond Futures. This improvement in liquidity is robust to the length of the event window around the structural change and trading in a control market.     

银行间市场流动性与金融风险救助机制研究

文章从我国银行间市场结构特征出发,分析了近年来银行间市场利率和流动性大 幅波动的内在机理与原因。研究认为,塔形市场交易结构下,银行间市场存在流动性风险易聚 集不易分散的缺陷,且难以依靠“有形之手”得到弥补。文章结合塔形市场结构的特点建立矩 阵分析法,对40家金融机构资产负债表进行实证分析。结论印证了理论分析,即塔形市场交易 结构下风险冲击影响时间更长,且央行流动性救助效果降低,但流动性救助机制能降低风险对 中小型地方法人金融机构的冲击。因此,有必要建立流动性风险救助机制,弥补银行间市场客 观存在的缺陷,增强中小型地方法人金融机构抵御银行间市场流动性风险冲击的能力。     

Strategic trading and learning about liquidity

Many practitioners point out that the speculative profits of institutional traders are eroded by the difficulty in gauging the price impact of their trades. In this paper, we develop a model of strategic trading where speculators face such a dilemma because of incomplete information about time-varying market liquidity. Unlike the competitive market makers that they trade against, informed traders do not know the distribution of liquidity (“noise”) trades. Instead, they have to learn about liquidity from past prices and trading volume. This learning implies that strategic trades and market statistics such as informational efficiency are path-dependent on past market outcomes. Our paper also has normative implications for practitioners.     

Order-to-trade ratios and market liquidity

We study the impact on market liquidity of the introduction of a penalty for high order-to-trade ratios (OTRs), implemented by the Italian Stock Exchange to curtail high-frequency quote submission. We find that the fee is associated with a collapse in the quoted depth of the stocks that make up the bulk of trading in Italian equities and with an increase in price impacts of trading across the treated stocks. Spreads do not change, however. Stocks from a pan-European control sample show no such liquidity changes. Thus, the Italian OTR fee had the effect of making Italian stocks markets more shallow and less resilient. Large stocks are more severely affected than midcaps. We also find evidence of a limited decrease in turnover. Consolidated liquidity, constructed by aggregating across all electronic trading venues for these stocks, decreases just like that on the main exchange. Thus, liquidity was not simply diverted from the main exchange, it was reduced in aggregate.     

我国金融市场与流动性关联研究——基于VAR模型的实证分析

本文运用结构型多向量自回归模型SVAR揭示了M2的变动对金融子市场的整体影响,结果显示M2的变动能在约7个月后对各金融子市场达到影响最大化。脉冲模拟则显示M2的变动容易造成股票市场短期波动而长期影响却不明显,对银行间债券市场的流动性则影响显著,其预测误差贡献率达到28%,从侧面证明银行间债券市场流动性风险易集聚。进一步的模型检验证明：银行间债券市场存在正反馈交易情况最为强烈,发生流动性黑洞可能性大于其它市场。最后,本文对实证结果作了原因分析并提出建议。     

Option market making under inventory risk

We propose a mean-variance framework to analyze the optimal quoting policy of an option market maker. The market maker’s profits come from the bid-ask spreads received over the course of a trading day, while the risk comes from uncertainty in the value of his portfolio, or inventory. Within this framework, we study the impact of liquidity and market incompleteness on the optimal bid and ask prices of the option. First, we consider a market maker in a complete market, where continuous trading in a perfectly liquid underlying stock is allowed. In this setting, the market maker may remove all risk by Delta hedging, and the optimal quotes will depend on the option’s liquidity, but not on the inventory. Second, we model a market maker who may not trade continuously in the underlying stock, but rather sets bid and ask quotes in the option and this illiquid stock. We find that the optimal stock and option quotes depend on the relative liquidity of both instruments as well as on the net Delta of the inventory. Third, we consider an incomplete market with residual risks due to stochastic volatility and large overnight moves in the stock price. In this setting, the optimal quotes depend on the liquidity of the option and on the net Vega and Gamma of the inventory.      

The impact of short-selling and margin-buying on liquidity: Evidence from the Chinese stock market

We propose a framework based on limit order book to analyze the impact of short-selling and margin-buying on liquidity. We show that when short-sellers are perceived as informed, adverse selection may lead to uninformed traders withdrawing their limit orders. Given that the Chinese stock market has strong information asymmetry and a high proportion of uninformed traders, we predict that the pilot program launched in March 2010, which lifts restrictions on short-selling and margin-buying for a designated list of stocks, may have a negative impact on liquidity. We perform difference-in-differences tests and show evidence that allowing for short-selling and margin-buying indeed has a significantly negative impact on liquidity for stocks on the designated list. In particular, the negative impact on liquidity is more pronounced for stocks with high information asymmetry. Nevertheless, when short-selling volume dries up due to regulation changes in August 2015, i.e., the “T+1” trading rule on short-selling, we show that consistent with model predictions, lifting restrictions on short-selling and margin-buying has a positive effect on liquidity.     

Return spread and liquidity: Evidence from Hong Kong ADRs

Fifteen Chinese H-shares listed on the Stock Exchange of Hong Kong are cross listed as ADRs on the NYSE. We empirically determine the role of security specific liquidity associated with those ADRs and their underlying H-shares on return spreads, differences between the returns on ADRs and their corresponding H-shares after controlling for ADRs and H-shares excess market returns and their respective price inverses denoting conditional betas. We use three proxies for liquidity, trading volume, turnover, and illiquidity (Amihud, 2002) and find that only trading volume and turnover are consistent determinants of return spread for the majority of Chinese ADRs with primary listing in Hong Kong Stock Exchange (SEHK). We use a switching regression model and find that the model parameter estimates are not stationary and change, often drastically between pre and post 2000 and 2003. Further tests using Bai Perron indicate return spreads data as non-stationary with multiple regime changes during the sample period. Further the causes of non-stationarity seem to be largely security specific and not driven by broad market swings in either market.     

Multimarket trading and liquidity: a transaction data analysis of Canada–US interlistings

We use transaction data for Toronto Stock Exchange (TSE) listed stocks to examine the impact on trading costs of the decision to interlist on a US exchange. We measure trading costs using both ‘posted’ bid-ask spreads and ‘effective’ bid-ask spreads that measure actual transaction prices relative to standing bid-ask quotes. After controlling for price level, trade size and trading volume effects, we find that overall posted and effective spreads in the domestic (TSE) market decrease subsequent to the interlisting. However, the decrease in trading costs is concentrated in those TSE stocks that experience a significant shift of total trading volume (TSE and US) to the US exchange after listing. We interpret this result in the context of theories of multimarket trading as a competitive response by TSE market makers to the additional presence of US market makers.     

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.     

Order Imbalance in the FTSE Index Futures Market: Electronic versus Open Outcry Trading

Abstract:  This study examines trading activities before and after the transfer of the FTSE 100 index futures contract from open outcry to electronic trading. Daily order imbalance exhibits strong serial persistence in the electronic limit order market, but not in open-outcry trading. Both excess buying and selling reduce liquidity. In the electronic venue, prior market movements barely affect investors' buying or selling decisions. Excess buy orders do not generate any price impact, but sell orders do. Positive imbalances are more strongly autocorrelated than negative imbalances. No trading elements, such as order imbalance, volume, or open interest, are associated with volatility. Moreover, excess buying decreases volatility. Such evidence suggests that the development and growth of electronic trading has changed the dynamics of trading activities in many important ways.     

Does high-frequency trading actually improve market liquidity? A comparative study for selected models and measures

The increasing volume of messages sent to the exchange by algorithmic traders stimulates a fierce debate among academics and practitioners on the impacts of high-frequency trading (HFT) on capital markets. By comparing a variety of regression models that associate various measures of market liquidity with measures of high-frequency activity on the same dataset, we find that for some models the increase in high-frequency activity improves market liquidity, but for others, we get the opposite effect. We indicate that this ambiguity does not depend only on the stock market or the data period, but also on the used HFT measure: the increase of high-frequency orders leads to lower market liquidity whereas the increase in high-frequency trades improves liquidity. We hypothesize that the observed decrease in market liquidity associated with an increasing level of high-frequency orders is caused by a rise in quote volatility.     

Internal control reporting and market liquidity

We investigate the impact of the Sarbanes-Oxley Act of 2002 (SOX) on information asymmetry by analyzing the relation between SOX Sections 302 and 404 control reports and market liquidity using bid-ask spreads. Lower market liquidity indicates higher levels of information asymmetry implying that market participants perceive financial statement misstatement risk is higher. If SOX disclosures contain relevant information, then one would expect firms reporting internal control material weaknesses to have lower market liquidity. Accordingly, we find that market liquidity is lower (i.e., bid-ask spreads are higher) for firms reporting ineffective control compared to firms reporting effective control using either annual SOX 404 internal control reports or quarterly SOX 302 disclosure control reports, which suggests that SOX 302 and 404 reports provide useful information for identifying firms with a higher risk of financial statement misstatement. However, we do not find consistent results using two alternative liquidity measures: trading volume and market quality indices. We then examine whether changes in control reports are associated with changes in market liquidity. We generally do not find that firms with improved (deteriorated) control reports experience a larger decrease (increase) in bid-ask spreads or larger increases (decreases) in trading volume and market quality indices compared to other firms, suggesting that market participants do not discern a change in information asymmetry when the effectiveness of internal controls over financial reporting changes.     

Closing call auctions and liquidity

The present paper examines the impact of closing call auctions on liquidity. It exploits the natural experiment offered by the introduction of a closing call auction on the Australian Stock Exchange on 10 February 1997. The introduction of the closing call auction is associated with a reduction in trading volume at the close of continuous trading. However, bid‐ask spreads during continuous trading are largely unaffected by the introduction of the closing call auction. Therefore, closing call auctions consolidate liquidity at a single point in time without having any adverse effect on the cost of trading.     

Daily mutual fund flows and redemption policies

We examine how redemption policies affect daily fund flows in open-end mutual funds. Since short-term trading of fund shares, as manifested in daily fund flows, can have an adverse impact on returns to the fund’s shareholders, mutual funds might find it desirable to discourage short-term trading through the use of redemption fees. However, if daily fund flows are due to fund shareholders’ legitimate liquidity demands, the redemption fee would have little effect on daily fund flows and possibly adversely affect fund shareholders by imposing a liquidity cost on them. We find that the likelihood of a fund charging a redemption fee is largely a function of its overall fee structure. We also use a sample of funds that imposed redemption fees to examine whether the distribution of daily fund flows changes after the initiation of the redemption fee. We find that the redemption fee is an effective tool in controlling the volatility of fund flows.     

银行资产配置趋势与中央银行流动性管理——基于动力系统模型的模拟分析

近年来,我国宏观流动性投放逐步由以前的被动投放(外汇占款)向主动投放转变,银行业资产配置结构更趋多元化,金融创新更加活跃,这些都在一定程度上改变了金融体系流动性传导的渠道和机制,迫使我们重新审视流动性在金融体系中消长、转移的内在逻辑,探讨新形势下流动性管理的合理方式和路径。本文运用动力系统模型来分析和论证银行资产配置结构变化对市场流动性状况的影响机制,以及中央银行流动性管理工具的有效性。研究表明,银行资产配置趋势的同质化容易导致市场流动性状况的恶化;中央银行需要进一步完善利率传导机制,强化货币政策与宏观审慎评估政策的协同配合,以提升流动性管理的有效性。     

Liquidity,liquidity risk,and information flow: Lessons from an emerging market

This paper examines the role of public and private information flows in intraday liquidity and intraday liquidity risk in the Tunisian stock market. Our empirical results are based on ARMA and GARCH-type models and show that, for major Tunisian stocks, gradually elapsed public information together with gradually elapsed private information in the market is the dominant factor in liquidity improvements in the Tunisian stock market. Liquidity improvements are generated by a decrease in the bid-ask spread accompanied by an increase in the depth at best limit. Our results clearly indicate that the arrival of public information in a sequential manner is the dominant factor generating increases in liquidity risk related to the bid-ask spread, while the advent of private information in a contemporaneous manner is the dominant factor generating increases in liquidity risk related to the depth at best limit. Additionally, our results show that liquidity risk persistence disappears when trading volume and order imbalance are included as explanatory variables in the conditional variance equation.     

Competition in securities markets: the impact on liquidity

Competition for order flow is widely documented for U.S. markets, but is a relatively new phenomenon in European equities trading. Only with the Markets in Financial Instruments Directive, which went into effect in November 2007, did new trading venues emerge in Europe that for the first time ever seriously threatened established exchanges. Chi-X, one of the new competitors, has gained a considerable market share, eroding the traditional exchanges’ share of equities trading volumes. As the proliferation of new trading venues in Europe increases the danger of market fragmentation, this paper analyzes the potentially positive liquidity implications of a new trading venue. To this end, we examine the impact of the Chi-X market entry in French blue-chip equities on the liquidity of their home market. Our findings suggest that in consequence of the new competitor’s market entry, liquidity in the most actively traded stocks was enhanced on the home market during the observation period. This improvement exceeds the general European liquidity trend measured by a matching firm approach, which implies that despite fragmentation of order flow, market quality may even be enhanced.     

Understanding short-term price pressure from index reconstitutions: Evidence from the CSI 300

Motivated by the mixed results of the few prior studies, we focus on the short-term price performance of stocks added to or deleted from the CSI 300 Index. Consistent with the price pressure hypothesis, we evidence a temporary change in the prices of respective added and deleted stocks, followed by subsequent price reversions. To reconcile past studies, we also test several explanatory factors as potential sources of short-term price pressure. Results show that changes in investor trading behaviour, investor awareness, firm risk, and liquidity explain the short-term price pressure of added and deleted stocks, while changes in institutional trading, realised volatility, and liquidity explain the differences in the impact of reconstitutions between added and deleted stocks.