The majority of multiasset investment portfolios allocate most of their assets to a mix of stocks and bonds, ostensibly relying on the observed negative correlation between the two asset classes for diversification. Unfortunately, the observed negative correlation between equities and fixed income is not guaranteed to continue. Furthermore, although rates are beginning to rise from historic lows, bonds may take some time to provide satisfactory yields. Equity options may be used to reduce the risk of portfolios, generate income, or both. Historically, options strategies have been out of reach for most investors, but a growing number of exchange-traded funds offer access to option strategy indexes that can provide the potential for material improvements in the risk and reward of portfolios. In this article, the authors introduce a set of option strategy indexes linked to the NASDAQ-100 Index that can be accessed via exchange-traded funds and demonstrate how they can add value to multiasset portfolios.

Market fragmentation and technological advances increasing the speed of trading altered the functioning and stability of global equity limit order markets. Taking market resiliency as an indicator of market quality, we investigate how resilient are trading venues in a high-frequency environment with cross-venue fragmented order flow. Employing a Hawkes process methodology on high-frequency data for FTSE 100 stocks on LSE, a traditional exchange, and on Chi-X, an alternative venue, we find that when liquidity becomes scarce Chi-X is a less resilient venue than LSE with variations existing across stocks and time. In comparison with LSE, Chi-X has more, longer, and severer liquidity shocks. Whereas the vast majority of liquidity droughts on both venues disappear within less than one minute, the recovery is not lasting, as liquidity shocks spiral over the time dimension. Over half of the shocks on both venues are caused by spiralling. Liquidity shocks tend to spiral more on Chi-X than on LSE for large stocks suggesting that the liquidity supply on Chi-X is thinner than on LSE. Finally, a significant amount of liquidity shocks spill over cross-venue providing supporting evidence for the competition for order flow between LSE and Chi-X.

This paper analyses smart beta ETF performance and provides the first evidence on the funds’ performance persistence. Our sample is comprised of 152 US equity smart beta ETFs over the period June 2000 to May 2017. We found that as per the risk-adjusted performance, about 40% of smart beta ETFs outperformed their related traditional ETFs after expenses. The analysis of performance persistence conducted based on the relative performance of smart beta ETFs showed that the performance of winners and losers does persist in the year ahead. The persistence in performance was documented in seven out of nine peer categories.

We study the introduction of a microwave link between Frankfurt and London and identify its effects on German stocks that trade in both locations using French firms that trade only in London as the control group. We find that the link improves the integration between the two markets as evidenced by a reduction in arbitrage opportunities. The effects on market quality differ across stocks as high-frequency traders strategically utilize their speed advantage to supply or consume liquidity. In London, mid cap stocks benefit from increased liquidity provision whereas order flow for large stocks becomes more toxic. London's increased competitiveness for mid cap stocks also translates into an increase in its information share, while the information shares of large cap stocks are unchanged. These results suggest that market integration differently affects investors based on their speed advantage, trading venues based on their level of competitiveness, and stocks based on their size.

We show that “quasi-dark” trading venues, i.e., markets with somewhat non-transparent trading mechanisms, are important parts of modern equity market structure alongside lit markets and dark pools. Using the European MiFID II regulation as a quasi-natural experiment, we find that dark pool bans lead to (i) volume spill-overs into quasi-dark trading mechanisms including periodic auctions and order internalization systems; (ii) little volume returning to transparent public markets; and consequently, (iii) a negligible impact on market liquidity and short-term price efficiency. These results show that quasi-dark markets serve as close substitutes for dark pools and consequently mitigate the effectiveness of dark pool regulation. Our findings highlight the need for a broader approach to transparency regulation in modern markets that takes into consideration the many alternative forms of quasi-dark trading.