Conference Agenda

OTC markets exhibit a core-periphery interdealer network: 10-30 central dealers trade frequently and with many dealers, while hundreds of peripheral dealers trade sparsely and with few dealers. Existing work rationalize this phenomenon with exogenous dealer heterogeneity. We build a directed search model of network formation and propose that a core-periphery network arises from specialization. Dealers endogenously specialize in different clients with different liquidity needs. The clientele difference across dealers, in turn, generates dealer heterogeneity and the core-periphery network: The dealers specializing in clients who trade frequently form the core, while the dealers specializing in buy-and-hold investors form the periphery.

High Frequency Traders are not beneficial to the liquidity and efficiency of the stock market during flash crashes. Actually, and especially when crashes affect several stocks simultaneously, they consume the liquidity they should provide and originate a transient price impact which is not related to fundamentals. This is true even in a market where market makers are compensated for liquidity provision. The policy implication of our findings is that such a compensation scheme is not sufficient to prevent flash crashes from happening. These facts are uncovered by the analysis of a “big” dataset composed of all orders and transactions on stocks with categorized information about execution.

We show that “quasi-dark” trading venues, i.e., markets with varying degree of opacity, are important parts of modern equity market structure alongside lit markets and dark pools. Using the European MiFID II regulation as a quasi-natural experiment, we find that dark pool bans lead to (i) volume spill-overs into quasi-dark trading mechanisms; (ii) little volume returning to transparent public markets; and consequently, (iii) a negligible impact on market liquidity and short-term price efficiency. These results show that quasi-dark markets serve as close substitutes for dark pools and consequently mitigate the effectiveness of dark pool regulation. Our findings highlight the need for a broader approach to transparency regulation in modern markets that takes into consideration the many alternative forms of quasi-dark trading.