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Market Microstructure: New Tools and New Markets

Paper Session

Sunday, Jan. 7, 2018 1:00 PM - 3:00 PM

Loews Philadelphia, Commonwealth Hall D
Hosted By: American Finance Association
  • Chair: Brian Weller, Duke University

Tracking Retail Investor Activity

Ekkehart Boehmer
,
Singapore Management University
Charles Jones
,
Columbia University
Xiaoyan Zhang
,
Purdue University

Abstract

We provide an easy way to use recent, publicly available U.S. equity transactions data to identify retail purchases and sales. Based on retail order imbalances, we find that retail investors are informed at horizons up to 12 weeks. Individual stocks with net buying by retail investors outperform stocks with negative imbalances; the magnitude is approximately 10 basis points over the following week, or 5% annualized. Retail investors are better informed in smaller stocks with lower share prices. They do not, however, exhibit any market timing ability.

High-frequency Cross-market Trading: Model Free Measurement and Applications

Ernst Schaumburg
,
AQR Capital Management, LLC
Dobrislav Dobrev
,
Federal Reserve Board

Abstract

We propose a set of intuitive model-free measures of cross-market trading activity based on publicly available trade and quote data with sufficient time stamp granularity. By virtue of capturing the offset at which co-activity peaks, as well as its magnitude and dispersion, the measures allow us to shed new light on the distinct features of the high-frequency cross-market linkages in US Treasury and equity markets. First, the measures avoid reliance on noisy return series often used in the literature and demonstrate sharp identification of the prevailing lead-lag relationships between trading activity across markets. Second, we show how the measures can be used to examine price impact and liquidity provision in (near) arbitrage linked markets. In particular, we provide new evidence pointing to the fact that price discovery in US Treasury, equity and EUR/USD FX markets primarily takes place in futures rather than cash markets and we give a strong rationale for considering the cross-market price impact between arbitrage linked markets. Finally, we show that our measures of cross-market activity are closely linked with observed market volatility even after controlling for commonly used measures of individual market activity such as trading volume and number of transactions. Overall, our empirical findings suggest that accounting for cross-market trading activity is important when studying volatility and liquidity in US Treasury and equity markets.

The Value of a Millisecond: Harnessing Information in Fast, Fragmented Markets

Haoming Chen
,
University of New South Wales
Sean Foley
,
University of Sydney
Michael Goldstein
,
Babson College
Thomas Ruf
,
University of New South Wales

Abstract

We examine the introduction of an asymmetric, randomized speed bump that allows low-latency liquidity providers to avoid order-flow driven adverse selection by reacting to activity on other venues. The speed bump segments order flow and increases profits for fast liquidity providers on that venue at the expense of other liquidity providers and aggregate market quality. The negative effects are concentrated in stocks more exposed to immediate adverse selection ex-ante. Our findings have implications for speed differentials and the regulation of market linkages across fragmented trading venues.
Discussant(s)
Katya Malinova
,
University of Toronto
Clara Vega
,
Federal Reserve Board
Joshua Mollner
,
Northwestern University
JEL Classifications
  • G1 - General Financial Markets