Equity Trading in the 21st Century

Angel, James J.; Harris, Lawrence; Spatt, Chester S.

doi:10.2139/ssrn.1584026

Cited by 116 publications

(118 citation statements)

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“…For this group of securities, the prices that people trade at improve so as to offset the increase in the maker rebate, consistent with Colliard and Foucault (2012) and Angel, Harris, and Spatt (2011). We further find evidence that the cum fee realized spread, which proxies for liquidity makers' revenues, as well as trading volume and the fill rate for limit orders all increased, and that the price impact of marketable orders decreased.…”

Section: Discussionsupporting

confidence: 84%

“…Angel, Harris, and Spatt (2011) argue that introducing a maker rebate that is financed by a taker fee should have no effect, because in competitive markets the prices would adjust by the amount of the rebate. Colliard and Foucault (2012) formalize Angel, Harris, and Spatt's intuition and prove, without relying on perfect competition, that in the absence of frictions, only changes in the total fee retained by the exchange affect liquidity and trading volume.…”

Section: Introductionmentioning

confidence: 99%

“…1 or aggressive [market] order, is charged a fee." 3 Maker rebates aim to improve liquidity, by rewarding its provision, and to increase trading volume, yet theoretical studies have shown that they need not affect liquidity and that trading volume may, in fact, decline.Angel, Harris, and Spatt (2011) argue that introducing a maker rebate that is financed by a taker fee should have no effect, because in competitive markets the prices would adjust by the amount of the rebate. Colliard and Foucault (2012) formalize Angel, Harris, and Spatt's intuition and prove, without relying on perfect competition, that in the absence of frictions, only changes in the total fee retained by the exchange affect liquidity and trading volume.…”

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confidence: 99%

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Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality

Malinova

Park

2011

SSRN Journal

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Facing increased competition, over the last decade many stock exchanges changed their trading fees to maker-taker pricing, an incentive scheme that rewards liquidity suppliers and charges liquidity demanders. Using a change in trading fees on the Toronto Stock Exchange, we study whether and why the breakdown of trading fees between liquidity demanders and suppliers matters. Posted quotes adjust after the change in the fee composition, but the transaction costs for liquidity demanders remain unaffected once fees are taken into account. Yet, as posted bid-ask spreads decline, traders, in particular retail, use aggressive orders more frequently, and adverse selection costs decrease. JEL Classification: G12, G14. Keywords: Liquidity rebates, market quality, trading, maker-taker pricing, retail trading * TSX Inc. holds copyright to the data, all rights reserved. It is not to be reproduced or redistributed. TSX Inc. disclaims all representations and warranties with respect to this information, and shall not be liable to any person for any use of this information.The equity trading landscape has changed dramatically over the past two decades, bringing with it a host of new policy concerns. Technological innovation in the 1990s allowed the entry of fully electronic trading platforms, known in the United States as electronic communication networks (ECNs). Subsequent regulatory reforms 1 facilitated the competition among trading platforms, eliminated the privileges of incumbent exchanges, and ultimately forced the incumbents to abandon physical trading floors and become electronic limit order markets.In a limit order market, a trader can either specify the desired price and quantity by posting a limit order or the trader can accept the terms of a previously posted limit order by submitting a market order. To compete for trading volume, during the last decade most equity trading platforms in North America introduced cash incentives for posting attractively priced limit orders. These cash payments are part of an incentive scheme known as maker-taker pricing. Understanding the impact of trading platforms' innovative offerings, such as maker-taker pricing, has become increasingly important in the new competitive environment. In the past, exchanges in North America were non-profit entities with a mandate to serve their members. Facing stiff competition, they converted to shareholder-owned corporations, raising concerns that their profit-motivated "incentive schemes may run counter to the integrity of pricing and investor protection. 2 "Regulatory Role of Exchanges and International Implications of Demutualization" by Roel C. Campos, March 10, 2006, available at http://www.sec.gov/news/speech/spch031006rcc.htm. 1 or aggressive [market] order, is charged a fee." 3 Maker rebates aim to improve liquidity, by rewarding its provision, and to increase trading volume, yet theoretical studies have shown that they need not affect liquidity and that trading volume may, in fact, decline.Angel, Harris, and Spatt (2011) argue that ...

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Section: Discussionsupporting

confidence: 84%

Section: Introductionmentioning

confidence: 99%

mentioning

confidence: 99%

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Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality

Malinova

Park

2011

SSRN Journal

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“…34-61358, is an implicit acknowledgement that the markets are changing. Angel et al (2011) describe some of the changes. They look at trading in the large, and provide a clear picture of the current state of the equities market and of the trading innovations implemented in recent years.…”

Section: Prior Researchmentioning

confidence: 98%

High Speed Equities Trading: 1993–2012

Stoll

2014

Asia-Pac J of Fin Stud

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High speed trading has drawn the attention of regulators who fear that such trading harms markets and leads to excessive speculation.1 The Flash Crash of May 6, 2010 is taken as evidence of the potential harmful effects of high frequency trading. On the other hand, some view high frequency trading as a manifestation of technological advances that have reduced the optimal trade size and improved order routing. From that perspective, high speed trading is a continuation of a long-standing trend to more rapid and more efficient trading. This study shows that the speed of trading has changed dramatically. The average number of trades per day for large cap New York Stock Exchange stocks has risen from about 500 to more than 40 000 in the period 1993-2011. At the same time, the average trade size has fallen from 1600 shares to 200 shares. The ultimate sources of these changes are the technology that has automated almost all aspects of trading and the regulatory developments that have helped reduce bid-ask spreads and made markets more accessible. The result of these developments is that markets are considerably more liquid and less costly. High frequency traders draw on this liquidity and also contribute to it.

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“…Indeed, on the one hand, some studies have highlighted the benefits of HFT as a source of an almost continuous flow of liquidity (see e.g., Brogaard, 2010;Menkveld, 2013). On the other hand, other works (see e.g., SEC, 2010;Angel, Harris, and Spatt, 2011;Lin, 2012;Kirilenko and Lo, 2013) have pointed to HFT as a source of higher volatility in markets and as a key driver in the generation of extreme events like flash crashes, whose incidence has grown in the last decades (Johnson, Zhao, Hunsader, Meng, Ravindar, Carran, and Tivnan, 2012;Golub, Keane, and Poon, 2012). The regulatory framework is complicated by the fact that -although many explanations have so far been proposed for flash crashes -no consensus has yet emerged about the fundamental causes of these extreme phenomena (see Haldane, 2011).…”

Section: Introductionmentioning

confidence: 99%

Market stability vs. market resilience: Regulatory policies experiments in an agent-based model with low- and high-frequency trading

Leal¹,

Napoletano

2019

Journal of Economic Behavior & Organization

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe investigate the effects of different regulatory policies directed towards high-frequency trading (HFT) through an agent-based model of a limit order book able to generate flash crashes as the result of the interactions between low-and high-frequency (HF) traders. We analyze the impact of the imposition of minimum resting times, of circuit breakers (both ex-post and ex-ante types), of cancellation fees and of transaction taxes on asset price volatility and on the occurrence and duration of flash crashes. In the model, lowfrequency agents adopt trading rules based on chronological time and can switch between fundamentalist and chartist strategies. In contrast, high-frequency traders activation is event-driven and depends on price fluctuations. In addition, high-frequency traders employ low-latency directional strategies that exploit market information and they can cancel their orders depending on expected profits. Monte-Carlo simulations reveal that reducing HF order cancellation, via minimum resting times or cancellation fees, or discouraging HFT via financial transaction taxes, reduces market volatility and the frequency of flash crashes. However, these policies also imply a longer duration of flash crashes. Furthermore, the introduction of an ex-ante circuit breaker markedly reduces price volatility and removes flash crashes. In contrast, ex-post circuit breakers do not affect market volatility and they increase the duration of flash crashes. Our results show that HFT-targeted policies face a trade-off between market stability and resilience. Policies that reduce volatility and the incidence of flash crashes also imply a reduced ability of the market to quickly recover from a crash. The dual role of HFT, as both a cause of the flash crash and a fundamental actor in the post-crash recovery underlies the above trade-off.

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Equity Trading in the 21st Century

Cited by 116 publications

References 0 publications

Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality

Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality

High Speed Equities Trading: 1993–2012

Market stability vs. market resilience: Regulatory policies experiments in an agent-based model with low- and high-frequency trading

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