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Trading in Modern Markets

Paper Session

Saturday, Jan. 5, 2019 2:30 PM - 4:30 PM

Hilton Atlanta, 212-213-214
Hosted By: American Finance Association
  • Chair: Sunil Wahal, Arizona State University

Brokers and Order Flow Leakage: Evidence from Fire Sales

Andrea Barbon
Swiss Finance Institute
Marco Di Maggio
Harvard Business School & NBER
Francesco Franzoni
University of Lugano (USI) and Swiss Finance Institute
Augustin Landier
HEC Paris


Using trade-level data, we study whether brokers play a role in spreading order flow information in the stock market. We focus on large portfolio liquidations, resulting in temporary price drops and identify the brokers that intermediate these trades. These brokers’ clients are more likely to predate on the liquidating funds than to provide liquidity. Predation leads to profits of about 25 basis points over ten days and increases the liquidation costs for the distressed fund by 40%. This evidence suggests a role of information leakage in exacerbating fire sales.

Information, Liquidity, and Dynamic Limit Order Markets

Roberto Ricco
Bocconi University
Barbara Rindi
Bocconi University
Duane Seppi
Carnegie Mellon University


This paper describes price discovery and liquidity provision in a dynamic limit order market
with asymmetric information and non-Markovian learning. Investors condition on information
in both the current limit order book and also, unlike in previous research, on the prior order
history when deciding whether to provide or take liquidity. Numerical examples show that the
information content of the prior order history can be substantial. In addition, the information
content of arriving orders can be non-monotone in order direction and aggressiveness.

Speed Acquisition

Shiyang Huang
University of Hong Kong
Bart Yueshen


Speed has become a salient feature of modern financial markets. This paper studies investors’ endogenous speed acquisition, alongside their information acquisition. In equilibrium, speed heterogeneity endogenously arises across investors, temporally fragmenting the price discovery process. A deterioration in the long-run price informativeness ensues. Intra- and inter-temporal competition among investors drive speed and information to be either substitutes or complements. The model cautions the possible dysfunction of price discovery: An advancing information tech- nology might complement speed acquisition, which fragments the price discovery process, thus hurting price informativeness. Novel predictions are discussed regarding investor composition, fund performance, and trading volume.

Exchange Competition, Entry, and Welfare

Giovanni Cespa
City University London
Xavier Vives
IESE Business School


We assess the consequences for market quality and welfare of different entry regimes and exchange pricing policies in a context of limited market participation. To this end we integrate a two-period market microstructure model with an exchange competition model with entry in which exchanges supply technological services, and have market power. We find that technological services can be strategic substitutes or complements in platform competition. Free entry of platforms delivers a superior outcome in terms of liquidity and (generally) welfare compared to the case of an unregulated monopoly. Controlling entry or, even better typically, platform fees may further increase welfare. The market may deliver excessive or insufficient entry. However, if the regulator is constrained to not making transfers to platforms then there is never insufficient entry.
Sunil Wahal
Arizona State University
Uday Rajan
University of Michigan
Haoxiang Zhu
Massachusetts Institute of Technology
Jiasun Li
George Mason University
JEL Classifications
  • G1 - General Financial Markets