Market Making with Costly Monitoring: An Analysis of the SOES Controversy

Foucault, Thierry; Röell, Ailsa; Sandås, Patrik

doi:10.1093/rfs/hhg005

Cited by 117 publications

(70 citation statements)

References 11 publications

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“…The Left Hand Side of this inequality just restates Condition (14). The Right Hand Side implies that when there is an information event, limit orders placed at price A 1 do not yield positive expected profits.…”

Section: The Anonymous Limit Order Marketmentioning

confidence: 83%

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Does Anonymity Matter in Electronic Limit Order Markets?

Foucault¹,

Moinas²,

Theissen³

2007

Rev. Financ. Stud.

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149

139

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"Does Anonymity Matter in Electronic Limit Order Markets?"We develop a model of limit order trading in which some traders have better information on future price volatility. As limit orders have option-like features, this information is valuable for limit order traders. We solve for informed and uninformed limit order traders' bidding strategies in equilibrium when limit order traders' IDs are concealed and when they are visible. In either design, a large (resp. small) spread signals that informed limit order traders expect volatility to be high (resp. low). However the quality of this signal and market liquidity are different in each market design. We test these predictions using a natural experiment. As of April 23, 2001, the limit order book for stocks listed on Euronext Paris became anonymous. For our sample stocks, we find that following this change, the average quoted and effective spreads declined significantly. Consistent with our model, we also find that the size of the spread is a predictor of future price volatility and that the strength of the association between the spread and volatility is weaker after the switch to anonymity.

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Section: The Anonymous Limit Order Marketmentioning

confidence: 83%

“…In the rest of the paper, we will assume that the parameters satisfy Condition (14). This restriction on the parameters does not affect the findings regarding anonymity but it simplifies the presentation of the paper.…”

Section: A Benchmark : Symmetric Informationmentioning

confidence: 99%

Does Anonymity Matter in Electronic Limit Order Markets?

Foucault¹,

Moinas²,

Theissen³

2007

Rev. Financ. Stud.

Self Cite

149

139

View full text Add to dashboard Cite

show abstract

“…They will also discourage manipulative HFT strategies (like stuffing and spoofing) that involve massive order cancellations by rendering them uneconomical (Biais and Woolley, 2011;Prewitt, 2012). At the same time, rapid reaction to new information is often a way for market makers to minimize the risks of offering prices to other traders, and contributes to lower trading costs (Copeland and Galai, 1983;Foucault, Röell, and Sandås, 2003). In that, the imposition of cancellation fees could instead discourage the activity of active market makers and liquidity providers, and lead to an increase in transaction costs.…”

Section: Cancellation Feesmentioning

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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“…if the leader posts schedule T , (b) "shallow" if the leader posts schedule S or (c) "deep" if the 11 The informed dealer has no incentive to submit limit orders for more than 2 round lots since any additional round lot would only execute against orders sent by a speculator and therefore would lose money. The same argument applies for the follower since time priority is enforced.…”

Section: Timing and Market Structurementioning

confidence: 99%

Does Anonymity Matter in Electronic Limit Order Markets?

2003

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We analyze the effect of concealing limit order traders' identities on market liquidity. We develop a model in which limit order traders have asymmetric information on the cost of limit order trading (which is determined by the exposure to informed trading). A thin limit order book signals to uninformed bidders that the profitability of limit orders is small. This deters uninformed bidders from improving upon the posted quotes. Informed bidders exploit this effect by bidding as if the cost of liquidity provision were large when indeed it is small. This bluffing strategy is less effective when traders cannot distinguish between informative and uninformative limit orders.Hence informed bidders act more competitively in the anonymous market. For this reason, concealing limit order traders' IDs affects market liquidity in our model. We test this prediction using a natural experiment. On April 23, 2001, the limit order book for stocks listed on Euronext Paris became anonymous. We find that following this change, the average quoted spreads declined significantly whereas the quoted depth decreased.

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Market Making with Costly Monitoring: An Analysis of the SOES Controversy

Cited by 117 publications

References 11 publications

Does Anonymity Matter in Electronic Limit Order Markets?

Does Anonymity Matter in Electronic Limit Order Markets?

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

Does Anonymity Matter in Electronic Limit Order Markets?

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