L2 - Transparency, Anonymity, Fragmentation Flashcards
Anonymity
Info disclosure not the same in all markets
information transparency is different
diff set of regulation but for all:
B/S have to be the best execution conditions (otherwise traders can choose between diff. markets - making price more competitive?)
but problem: inclusion of fees?
relationship Annonimity vs liquidity
Anonymity is not compulsory &depends on:
a) traders decisions
b) transactions
Annonimity
Transparency
discrepancy of transparency:
- dark pools
- systematic internaliser
- regulated markets
- alternative platform
- -> to check if alternative transparency have consequence on market quality
- -> one has to focus on one specific change
Liquidity Variables
quotes Spread (QSp) - average of intraday relative quoted spread
DWQSp - average intraday quoted spreads weighted by depths (5 levels LOB)
Lambda - amount of money needed to mov the mid-price 100 Bpa. on both sides of the LOB
Anonymity Variable
Anon
–> proxy for the amount of transactions that are anonymous
Anon = Anon.Effective Volume/ Total Eff. Volume
Control Variables
volatility
absolute value of daily returns for each firm
don´t consider intraday estimators because of lack of intraday data
effective volume:
logarithm of total EV in Euros traded in all the venues of each firm
inverse of the closing price of each firm
Market Competition
Definition
History
traditionally:
- Europe: Monopoly
- US: 2 main markets ®ional exchanges
- Buyer - Seller - Broker - Market SE
Increase in competition:
- market liberalisation (mifid 1 and 2)
- business globalisation (many traders around he world)
- development of Info. Technology (elect. platform, internal centraliser)
Competitors are parallel markets where operations of any value can be executed
-ATs alternative trading systems
- ECN elect. communication Network
MTF (multilateral treading facilities)
Examples: BATS
Nowadays:
- the ECN or broker decides what to do with order:
a) hold it internally
b) place it on the market (market SE)
c) sent it to some trading platform (Market AS)
Competition between markets
Europe
European competition
- platform selling information to choose from:
a) regulated markets
b) MTF lit
c) MTF dark pools
Competition between markets
Mifid
situation arises because of competition to capture order traffic
Results of competition:
a) positive: lower costs (fees); new services (after-hours trading)
b) negative: fragmentation (less liquidity in each market)
less information (legislation tries to eliminate this effect, mifid 2)
Reaction:
- most markets decided to increase size
- integrating with markets of other countries
- incorporating diff. market segments in a single country
E.g.
Euronext = Paris, Brusells, Amsterdam
NYSE and Euronext merge
Nasdaq and OMX (baltic)
LSE and DB - but eu. commission block merge
BME bought by SIX (swiss)
Fragmentation
no competition between regulated markets (e..g spanish stocks traded mostly in home country)
bu COVId:
moved volume from platforms –> regulated (since RM are info providers)
Impact of Fragmentation to Liquidity
it is relevant to determine cost of liquidity SSE
linear term improves, but quadratic term deteriorates liquidity
beyond specific levels of fragmentation, increasing F makes liquidity worsening in RM
Algo &ultra HFT
technology plays important role in transaction technology
rise of machines - how technology impacts business landscape is impressive
ALGO - use of computers to manage the trading process
HTF - similar but holding shorter periods (mill/naosecs)
collocation: around the markets (renting place)
but Mifid doesn´t allow this, hence buy/rent capacity of the cable (send messages)
bt programmes have to adapt: price correlation affect by environemt/assets
latency - measures the time B–> M sends and M takes order
technology provides tools to make decisions in small time
A) Human decision ecosystem
decisions made by humns takes tim to process information (brain)
from the information to posting (processing and take info of what to buy an sell) - 1 min
not the case with machines
B) Algo-machines ecosystem
few millisecs needed to decide what to do
Innovation:
-a) spread networks - fiber optic innovation
- only tiny time saved of communication time, but enough to make profit
- HFT making money of B/S could save cost of $300mill with tiny fraction of time saved
b) microwaves
- HFT firm wants to develop a high-speed trading network by a tower between Britain and EU
- “flash boy” - build a tower
- move from five to microwave for long-distance trading
- mw travelling in air suffer less than 1% speed reduction compared to light travelling in vacuum, and light traveling with fiber is 30% slower
- bad news: RAIN!!
Machines control over 70% of volume in the WORLD
Impact on US Markets
volume hasn´t changed much bt nr. of messages (order, sell, cancel) has increase
Vol/Messages has decreased (as messageshas increased more than vol traded)
cost/money made per transaction is smaller, but more transaction at smaller price made
market manipulation has increased
pc 100 - machines sends order but in lss than 100millsecs its canceled
post-cancelling activities have increased
large movements in the market but without any actual transaction of volume taken place
many transaction at the same time
e.g. 200 transactions but only 35 actual tades
Regulatory Bodies &Market Participants distinguished
a) bad HFT
adv. over other MP and ability to detect market inefficiencies( arbitrage opportunities)
charges:
FRONTRUNNING
- early access to quotes, hence buy low and sell high later
quote STUFFING: market manipulation by sending fast, withdrawing large nr. of orders
- high speed of operation it creates false impression of market situation - hence others execute against phantom orders
- create noise
- markets slow down but HFT obtain speed advantage
Quote SPOOFING:
- adding visible order(s) that creates new best B/O or adds significantly to the liquidity displayed at existing best B/O)
- but offer is cancelled prior to deal´s execution
- and during this time trader executes order on the opposite time
- creates false sentiment in market
- trade can manipulate the actions of the market participants, change price of security
- execution occur at a favourable price for trader, then it would obtained with absence of these first orders
= market manipulation
