« Back to Results
Loews Philadelphia, Regency Ballroom C1
American Finance Association
Market Microstructure and Design
Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM
- Chair: Haoxiang Zhu, Massachusetts Institute of Technology
The Ambivalent Role of High-Frequency Trading in Turbulent Market Periods
AbstractWe show an ambivalent role of high-frequency traders (HFTs) in the Eurex Bund Futures market around high-impact macroeconomic announcements and extreme events. Around macroeconomic announcements, HFTs serve as market makers, post competitive spreads, and earn most of their profits through liquidity supply. Right before an announcement, however, HFTs significantly widen spreads and cause a rapid but short-lived dry-up of liquidity. In turbulent periods, such as after the U.K. Brexit announcement, HFTs shift their focus from market making activities to aggressive (but not necessarily profitable) directional strategies. Then, HFT activity becomes dominant and market quality can degrade.
Inverted Fee Venues and Market Quality
AbstractStock exchanges incentivize the demand and supply of liquidity through their fee models. A traditional model pays a rebate to the liquidity supplier and an inverted model pays a rebate to liquidity demanders. We examine the impact of inverted fee models on market quality using an exogenous shock to inverted venue market share created by a regulatory intervention – the 2016 Tick Size Pilot. We show higher inverted venue share improves pricing e ciency and decreases volatility. Our findings suggest that the finer pricing grid provided by inverted venues encourages competition between liquidity providers and improves market quality.
University of Southern California
New York University
University of Illinois-Urbana-Champaign
- G1 - General Financial Markets