CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf
Competition, Division and Unity: The Impact of Market Structures on Trading Quality
Stockholm University, Faculty of Social Sciences, Stockholm Business School.ORCID iD: 0000-0002-2803-5753
2024 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

The financial market operates as an ecosystem, involving diverse yet interconnected marketplaces and participants. Market design, intricately interacting with technology, regulation, and competition, shapes how participants adapt their trading behavior and therefore influences market performance. This dissertation investigates how market microstructure impacts the behavior of fast and slow traders, the incentive for liquidity provision and liquidity demand, and the competition between exchanges for gaining order flow.

Article I examines a strategic solution to the concern that fast arbitrageurs make liquidity provision more costly by picking off quotes before market makers have time to revise them. The solution in question was to prohibit proprietary traders from engaging in liquidity taking, which prevents fast arbitrageurs from sniping market makers’ stale quotes. The results reveal that the trading ban mitigated adverse selection costs and narrowed the bid-ask spread. Market makers experienced higher profits and quoted higher volumes at better prices. The ban successfully eliminated over half of cross-exchange toxic arbitrage trades.

Article II evaluates the market quality effects of market fragmentation. The study leverages a quasi-natural experiment, which occurred when the Swiss stock markets suddenly transitioned from fragmentation to centralization in July 2019, following the breakdown of EU-Switzerland equivalence rules. Because this event was unrelated to technological developments, and did not disrupt trading, it establishes a firm ground for identifying the effect of fragmentation. The key finding is that greater market fragmentation improves market liquidity, as captured by bid-ask spreads and depth, while it does not impact market efficiency. These results align with theoretical predictions stating that market fragmentation improves liquidity through quote competition across exchanges.

Article III studies the role of restrictions on the minimum tick size and the minimum lot size for determining transaction costs at the futures market. The arrangement of minimum tick and lot sizes by regulators constrains trading at discrete prices and quantities. The study demonstrates, both theoretically and empirically, a trade-off between the restrictions of discrete price and discrete quantity. Given this tradeoff, a futures exchange can minimize futures transaction costs by choosing the optimal futures price. That is, when the futures price is high, it is also relatively more continuous, and the futures quantity is relatively more discrete, compared to the case when the futures price is low. In other words, when the futures price is high rather than low, the lot size restriction causes relatively more friction than the tick size restriction and vice versa. The empirical results strongly support the model.

 

Place, publisher, year, edition, pages
Stockholm: Stockholm Business School, Stockholm University , 2024. , p. 12
Keywords [en]
Market microstructure, latency arbitrage, fragmentation, tick size, lot size, liquidity, adverse selection, market efficiency
National Category
Business Administration
Research subject
Business Administration
Identifiers
URN: urn:nbn:se:su:diva-225463ISBN: 978-91-8014-641-8 (print)ISBN: 978-91-8014-642-5 (electronic)OAI: oai:DiVA.org:su-225463DiVA, id: diva2:1829398
Public defence
2024-03-04, Lecture Room 19 (Lärosal 19), 2nd floor, House 2, Campus Albano, Albanovägen 18, Stockholm, 13:00 (English)
Opponent
Supervisors
Available from: 2024-02-08 Created: 2024-01-18 Last updated: 2024-02-01Bibliographically approved
List of papers
1. Latency Arbitrage and Market Liquidity
Open this publication in new window or tab >>Latency Arbitrage and Market Liquidity
(English)Manuscript (preprint) (Other academic)
Abstract [en]

There is an increasing concern that fast arbitrageurs cause market making more expensive by picking off quotes before the liquidity provider can revise them. This paper shows that restricting aggressive proprietary trading improves adverse selection and liquidity. Specifically, by restricting aggressive proprietary trading, adverse selection costs measured by permanent price movement declined by 21%, liquidity measured by bid-ask spread declined by 11%, and liquidity providers earned higher realized spreads and quoted higher volumes at better prices. In addition, this paper shows that restricted cross-exchange latency arbitrage eliminated more than half of all toxic arbitrage trades. Market makers can benefit from a lower likelihood of being sniped when public information arrives and therefore are subject to lower adverse selection costs. These findings suggest that restricting latency arbitrage improves liquidity by reducing toxic arbitrage.

Keywords
Adverse selection; latency arbitrage; toxic arbitrage; passive liquidity protection.
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-225369 (URN)
Available from: 2024-01-16 Created: 2024-01-16 Last updated: 2024-02-26Bibliographically approved
2. Market Fragmentation, Liquidity, and Efficiency
Open this publication in new window or tab >>Market Fragmentation, Liquidity, and Efficiency
(English)Manuscript (preprint) (Other academic)
Abstract [en]

This paper uses a unique quasi-natural experiment to study the market quality effects of market fragmentation across stock exchanges. In July 2019, following the breakdown of EU-Swiss equivalence rules, the Swiss stock markets transitioned from being fragmented to being centralized. As the event was non-gradual (fragmentation went from 31% to zero overnight), widely anticipated, and unrelated to technological developments, strong identification was possible. The main result is that greater market fragmentation leads to greater market tightness and depth without affecting market efficiency. The results confirm theoretical predictions that market fragmentation boosts liquidity through quote competition across exchanges.

Keywords
Market microstructure, fragmentation, liquidity, market efficiency
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-225419 (URN)
Available from: 2024-01-16 Created: 2024-01-16 Last updated: 2024-02-26Bibliographically approved
3. Tick Size, Lot Size, and Liquidity in Futures Trading
Open this publication in new window or tab >>Tick Size, Lot Size, and Liquidity in Futures Trading
(English)Manuscript (preprint) (Other academic)
Abstract [en]

Futures are standardized and heavily regulated contracts, and these features make futures trading possible on liquid secondary markets. However, regulations constrain futures trading at discrete prices and quantities by imposing a minimum tick size and a minimum lot size. We show, theoretically and empirically, that the tick size and the lot size are important for futures trading costs. In our model, we express the bid-ask spread of futures, given lot size and tick size restrictions, as a function of futures volatility and trading activity by informed and uninformed traders. Our empirical results support the theoretical model.

Keywords
Futures, tick size, lot size, transactions costs
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-225461 (URN)
Available from: 2024-01-16 Created: 2024-01-16 Last updated: 2024-02-26Bibliographically approved

Open Access in DiVA

Competition, Division and Unity: The Impact of Market Structures on Trading Quality(2037 kB)73 downloads
File information
File name FULLTEXT01.pdfFile size 2037 kBChecksum SHA-512
59fb2b0526116decac3a93074220ae818561a3ae103c934f68b37de67fb7e03d1c117136b95c8d1b9661907a45bfe424218c1c0340bf7a91dc2fa69a3495d3bc
Type fulltextMimetype application/pdf

Search in DiVA

By author/editor
Qu, Chengcheng
By organisation
Stockholm Business School
Business Administration

Search outside of DiVA

GoogleGoogle Scholar
Total: 73 downloads
The number of downloads is the sum of all downloads of full texts. It may include eg previous versions that are now no longer available

isbn
urn-nbn

Altmetric score

isbn
urn-nbn
Total: 664 hits
CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf