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FMG-4: Market Design
Trading Fees and Intermarket Competition
1University of Pittsburgh; 2Bocconi University; 3The Ohio State University
We model an order book with liquidity rebates (make fees) and trading fees (take fees) that faces intermarket competition, and use the model's insights to explain changes in market quality and market shares following changes in make-take fees. As predicted by our model, we document that fee changes by one venue affect market quality and market shares for all venues that compete for order fow. Furthermore, we document cross-sectional differences in changes in market quality and market shares following a simultaneous decrease in both make and take fees consistent with traders in large (small) capitalization stocks being more sensitive to the change in make (take) fees.
Traders' Order Routing Decisions - Evidence from a Dark Pool Experiment
Ludwig-Maximilians-Universität München, PwC
Conducting a laboratory experiment, this paper investigates pre-trade market transparency effects on individual decision making and aggregated market characteristics in alternating opacity regimes. Several channels of traders' venue selection are identified. Specifically, liquidity traders trade more aggressively than do informed traders, while both types seem to substitute marketable orders for limit orders as depth in the book increases. In addition, traders route pinging orders to the dark pool when market uncertainty is high. Liquidity traders show a lower propensity than informed traders to place pinging orders in the benchmark regime. Although the benchmark has detrimental effects on total depth and price impact, the experiment provides evidence on improved depth, bid-ask spread, price impact in the dark and benchmark regime and on improved informational efficiency in the dark regime over time.
Do You See What I See? Transparency and Bond Issuing Costs
University of Melbourne
Using the staggered implementation of the Trade Reporting and Compliance Engine (TRACE) as a natural experiment, we show that bonds issued in a transparent environment receive higher prices (or equivalently pay lower yield spreads to benchmark US treasury bonds) relative to control bonds issued in the opaque, pre-TRACE environment. The yield spread on a typical pre-TRACE issuance of 132bps falls by 12bps following implementation of TRACE. We do not detect a significant effect on underpricing or fees and expenses paid in the issuing process. The main driver of the reduction in the cost of capital for bond issuers is the mitigation of information asymmetry rather than improved liquidity in the secondary market.
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Conference: EFA 2017
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