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Session Overview
Session
MM-1: The Speed and Transparency of Trading
Time:
Friday, 23/Aug/2019:
13:30 - 15:00

Session Chair: Batchimeg Sambalaibat, Indiana University
Location: D -105

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Presentations

Endogenous Specialization and Dealer Networks

Batchimeg Sambalaibat

Indiana University, United States of America

Discussant: Bernard Herskovic (UCLA)

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.

efa2019-MM-1-2077-Endogenous Specialization and Dealer Networks.pdf


High-Frequency Trading During Flash Crashes: Walk of Fame or Hall of Shame?

Mario Bellia1, Kim Christensen2, Aleksey Kolokolov3, Loriana Pelizzon1, Roberto Reno4

1Research Center SAFE - Goethe University; 2CREATES, Aarhus University; 3Alliance Manchester Business School; 4Department of Economics, University of Verona

Discussant: Katya Malinova (McMaster University)

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.

efa2019-MM-1-1935-High-Frequency Trading During Flash Crashes.pdf


Quasi-dark trading: The effects of banning dark pools in a world of many alternatives

Thomas Johann1, Talis Putnins2,5, Satchit Sagade3,6, Christian Westheide4

1University of Mannheim; 2University of Technology Sydney; 3University of Frankfurt; 4University of Vienna; 5Stockholm School of Economics, Riga; 6Research Center SAFE

Discussant: Laurence Lescourret (ESSEC Business School)

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.

efa2019-MM-1-1246-Quasi-dark trading.pdf


 
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