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MM-5: Market design and Liquidity
Market Structure and Corporate Payout Policy: Evidence from a Natural Experiment
1Guangxi University, China, People's Republic of; 2University of Illinois Urbana-Champaign; 3NBER
In 2016, the Securities and Exchange Commission increased tick size (the minimum price variation) for 1,200 randomly selected firms, and imposed restrictions on dark-pool trading on 400 of them. We find that firms reduce share repurchases by 67% and total payout by 51% once they face binding tick-size constraints in both stock exchanges and dark pools. Surprisingly, firms with large increases in depth, especially on the bid side, reduce their payouts the most because regulations on share repurchases discourage the use of market orders, which turns a market with great depth into an illiquid market for repurchasing firms.
Dark Trading and the Fundamental Information in Stock Prices
1David Eccles School of Business, University of Utah; 2Cox School of Business, Southern Methodist University
We study the causal effect of dark trading on the incorporation of firm-specific fundamental information into stock prices. Theory suggests dark pools may facilitate or discourage price informativeness. Using a comprehensive sample of dark trading activity, we find that a higher level of dark trading is associated with greater firm-specific fundamentals in stock prices. To overcome endogeneity concerns we exploit the SEC’s Tick-Size Pilot Program that resulted in a large exogenous shock to dark pool trading. The results remain. The results cannot be explained by liquidity, price efficiency, or high frequency traders. In support of the information acquisition interpretation, we directly observe a shift in the information acquisition through SEC EDGAR searches for the treatment firms, among other evidence around the exogenous shock to dark trading. Overall, the evidence is consistent with dark trading improving the incorporation of firm-specific fundamentals into stock prices.
Cross-Venue Liquidity Provision: High Frequency Trading and Ghost Liquidity
1KU Leuven, IWH, CEPR; 2UCLouvain, Louvain School of Management; 3Université Paris-Dauphine, PSL, DRM, CNRS; 4Cass Business School, City University of London
We measure the extent to which consolidated liquidity in modern fragmented equity markets overstates true liquidity due to a phenomenon that we call Ghost Liquidity (GL). GL exists when traders place duplicate limit orders on competing venues, intending for only one of the orders to execute, and when one does execute, duplicates are cancelled. We employ data from 2013, covering 91 stocks trading on their primary exchanges and three alternative platforms and where order submitters are identified consistently across venues, to measure the incidence of GL and to investigate its determinants. On average, for every 100 shares passively traded by a multi-market liquidity supplier on a given venue, around 19 shares are immediately cancelled by the same liquidity supplier on a different venue. This percentage is significantly greater for HFTs than for non-HFTs and for those trading as principal. GL is larger on alternative platforms than on primary exchanges. Overall, GL implies that simply measured consolidated liquidity exceeds true consolidated liquidity but its average weight in total consolidated depth, i.e., slightly more than 4%, does not challenge the liquidity benefits of fragmentation.
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