Intraday Liquidity Research Articles

Examining Market Quality on the Egyptian Exchange (EGX): An Intraday Liquidity Analysis

This study examines the intraday dynamics of liquidity and trading activity on the Egyptian Exchange (EGX) to assess its market quality. Using reconstructed five-minute limit order book data, this study measures liquidity dimensions and explores anomalies through interval-of-day and day-of-week models. Key findings reveal an inverted J-shaped pattern in spreads due to information asymmetry, a U-shaped pattern in total depth, and a J-shaped market depth pattern. Additionally, significant day-of-week effects are observed, with Sundays showing the lowest liquidity and Thursdays the highest trading activity. These patterns highlight the impact of the EGX’s unique microstructure, including tick sizes and a preference for limit orders. This study underscores the influence of market structure on liquidity, trading efficiency, and cost, emphasizing the need for tailored regulatory and trading strategies. It provides valuable insights for investors optimizing trading strategies and policymakers seeking to enhance market integrity. Concluding, this research offers a foundation for understanding intraday liquidity patterns in emerging markets like the EGX and proposes future exploration of how information flows and trading mechanisms affect price discovery and market efficiency.

When It Rains, It Pours: Cyber Vulnerability and Financial Conditions

We analyze how systemic cyber risk relates to the financial cycle and show that the potential impact of a cyberattack is systematically greater during stressed financial conditions. This has been true over the past two decades, particularly at the onset of the COVID-19 pandemic, when changes in payment activity increased vulnerability by approximately 50 percent relative to the rest of 2020 through more concentration and intraday liquidity stress. We evaluate the effectiveness of policy interventions used to stabilize markets and mitigate cyber vulnerability. We argue that cyber and other financial shocks cannot be treated as uncorrelated vulnerabilities and policy solutions for cyber vulnerability need to be calibrated for adverse financial conditions.

Intraday liquidity risk: based on microprudential and macroprudential regulatory perspective

ABSTRACT This paper addresses the effectiveness of current regulations on intraday liquidity risk through a comprehensive analysis using network structure and payment flow characteristics of China’s large-value payment system. Utilizing simulation and econometric methods, it examines the factors influencing the upper limit of liquidity levels required by payment system participants to satisfy real-time gross settlement (RTGS) and its tail distribution. The results of the study show that: (1) in a network topology, the characteristics of a node significantly affect its demand for intraday liquidity and its exposure to intraday liquidity risk; (2) microprudential regulation based only on individuals not only fails to achieve macroprudential regulatory objectives, but also fails to realize individual microprudential regulatory objectives, and at the same time, it reduces the efficiency of liquidity use; (3) reallocating intraday liquidity among participants based on systemic effects not only saves liquidity overall, but also achieves the macroprudential regulatory objective of liquidity at a high probability level. This study provides valuable theoretical and practical insights for regulators and financial managers, emphasizing the importance of effective regulation to prevent the evolution of intraday liquidity risk into systemic risk.

Reducing transaction costs using intraday forecasts of limit order book slopes

AbstractMarket participants who need to trade a significant number of securities within a given period can face high transaction costs. In this paper, we document how improvements in intraday liquidity forecasts can help reduce total transaction costs. We compare various approaches for forecasting intraday transaction costs, including autoregressive and machine learning models, using comprehensive ultra‐high‐frequency limit order book data for a sample of NYSE stocks from 2002 to 2012. Our results indicate that improved liquidity forecasts can significantly decrease total transaction costs. Simple models capturing seasonality in market liquidity tend to outperform alternative models.

A token-based operating model unifying traditional and token-based operations for security services

Asset tokenisation is expected to have an impact on the financial services industry in the future. This paper examines the necessity for traditional custodians to enter tokenised markets to propose a future operating model for traditional custodians. We explore the advantages, such as leveraging regulatory expertise and existing customer bases and challenges, including the adoption of new technology stacks involved in such a model. Our proposed operating model utilises a blockchain infrastructure that relies on the use of tokens that spans both traditional and digital assets to create an automated platform. This platform can include the automation of credit risk and liquidity across multi-asset classes and multi-jurisdictional operations. Notably, our model introduces two types of tokens: value tokens (the fully digital or tokenised assets as well as tokenised money) and proxy tokens (among others, representing traditional assets). While value tokens carry value and represent tokenised assets, proxy tokens do not carry value. These proxy tokens are an internal representation of traditional assets that can facilitate managing the intra-day liquidity and extended credit lines offered to customers. Within our proposed operating model, all transaction instructions, whether in the traditional or tokenised realm, are streamlined through a unified ‘instruction worklist’. We conclude the paper with a proposed schematic architecture for the technical implementation of the operating model.

Unlocking the True Price Impact: Intraday Liquidity and Expected Return in China’s Stock Market

Unlocking the True Price Impact: Intraday Liquidity and Expected Return in China’s Stock Market

No more tears without tiers? The impact of indirect settlement on liquidity use in TARGET2

We study the impact of tiered payments originating from client banks on the liquidity consumption (relative intraday liquidity use) of settlement banks. Estimates of a panel data model, employing wholesale payments in euro, show that a higher share of tiered payments reduces liquidity consumption by settlement banks. Metrics on timing, delay, and payment priorities suggest that settlement banks use more leeway in settling tiered payments from client banks compared to in-house payments. Payment timing as a proxy for external delay suggests that tiered payments help smooth liquidity positions. Payment delay within the system does not follow a clear dynamic over time, whereas banks consistently de-prioritize tiered payments. Thereby, settlement banks employ tiered arrangements to manage intraday liquidity more efficiently. To a certain extent, this hints at “free riding” or higher recycling of liquidity from client banks’ payments. However, the results are also consistent with settlement banks’ monitoring role or tiered payments potentially exhibiting different characteristics which may be attributable to contractual arrangements.

Modernising intra-day liquidity optimisation for commercial banks

Commercial banks are facing a period of exceptionally difficult funding conditions amidst a challenging economic environment. To address this, banks need to optimise their liquidity flows and usage. But existing liquidity optimisation and management methods fall short of materially reducing liquidity costs and can generate large operational risks. This paper describes how advanced analytics and algorithms can be used to optimise liquidity flows and usage in a real-time environment through payment resequencing. This approach can enable banks to significantly and consistently reduce liquidity usage and costs, potentially turning more effective treasuries into profit centres. This paper also describes the fundamental requirements for embarking on a modern liquidity optimisation project and also presents some recommendations for best practices in operational and technological infrastructure.

Intraday liquidity modelling using statistical methods

The correct approach to liquidity risk management in banks is essential for securing their financial stability. The position of liquidity risk among the rest of bank risks is specific because the negative outcome is not just a loss, but directly the bankruptcy of the institution. Such an occurrence might start a chain reaction and bring uncertainty into the entire financial system. This paper focused on one source of liquidity risk, i.e. management of liquidity throughout the day. The management of intraday liquidity is related to cash inflows and outflows occurring during the business day, their timing and settlement. In 2013, the BCBS published the document Monitoring tools for intraday liquidity management, often referred to by the regulatory authorities. It offers basic concepts of intraday liquidity monitoring and sketchily defines stress scenarios. The author suggests possibilities of how to perform intraday liquidity stress testing in a bank, which is often required by supervisors, even though no detailed approach or methodology as to how to proceed was introduced by the regulators. The research was carried out on anonymised data of cash inflows and outflows recorded on a central bank reserves account of one of the Slovak commercial banks. Both a base and four stress scenarios were developed and suggested for the better understanding of expected cashflows in standard conditions and during stress. The author’s aim was to develop scenarios in a non-traditional way by means of a basic and EWMA historical bootstrap simulations, respectively. Stress scenarios are supposed to simulate reputation crisis, disruption in RTGS payment system, increased deposit outflows and bank run. The purpose of the proposed intraday liquidity monitoring scenarios was to strengthen resilience not only for a concrete bank, but also the entire financial system. Intraday liquidity monitoring is a key factor in securing stability of the financial sector.

Passive investors and concentration of intraday liquidity: Evidence from the Tokyo Stock Exchange

This paper uses the revision of the Tokyo Stock Exchange's circuit breakers in 2019 as a natural experiment to provide empirical evidence that passive investors’ executions are concentrated and affect intraday liquidity. After the revision, which attracts the passive traders to execute at the close, the stock more owned by passive funds: (i) has more concentrated execution at closing auctions; (ii) reduces its transaction costs more in continuous sessions; and (iii) has less price-efficient overnight return. These findings are consistent with the implication of the dynamic limit order market model in the previous research that indicated the passive investor has higher costs to wait for the execution. Our results imply the importance of the passive investors’ intraday behavioral change due to a shift in execution constraints, especially when the passive investments have a high market share.

Intraday liquidity in soybean complex futures markets

AbstractWe examine persistence and cross‐market liquidity spillovers in the Chicago Mercantile Exchange soybean complex futures markets. A multidimensional liquidity measure is derived from the limit‐order‐book, and a Vector Heterogeneous Autoregressive model estimates high‐resoluted liquidity from 30 s to one trading day. We find traders' order placement influenced by the liquidity of related markets. Liquidity persistence and positive liquidity spillovers mainly occur within 30 s, whereas spillovers for longer horizons are mostly negative. Findings are important for hedgers that hedge the crush and traders who wish to capitalize on the short‐term deviation of price relationships.

Intraday Patterns of Liquidity on the Warsaw Stock Exchange before and after the Outbreak of the COVID-19 Pandemic

A highly significant feature of the stock market is its efficiency, which is associated with information efficiency. However, the liquidity of stock on the market is its essential characteristic. The inflow of information in highly liquid markets allows for the maintenance of high information efficiency. The COVID-19 pandemic affected many aspects related to stock markets, including their liquidity. The impact of the pandemic is so multidimensional that there are still areas that need to be investigated. One of them is the intraday liquidity patterns on the stock markets. Therefore, the present paper aims to verify the existence of intraday liquidity patterns on the Warsaw Stock Exchange in three periods: before, during and after the panic caused by the first wave of the COVID-19 pandemic. The results confirmed the existence of a U-shaped intraday distribution of the number of transactions and their trading. This outcome highlights the importance of the first and last minutes of a trading session. The COVID-19 pandemic resulted in the domination of WSE transactions of small individual investors who feared the loss of value of their assets, selling them on the stock exchange. In the pandemic, the average percentage change between transactions increased.

Does Liquidity Matter When Crisis Is Brewing? Equity Returns and Intraday Liquidity in DAX Futures Market

Inspired by Mishkin (2011), we study a sample of high-frequency Eurex trading data from the peak of economic expansion preceding the global financial crisis of 2007-2009. Trading volume measures and bid￾ask spread in DAX futures market explain DAX equity returns. Advanced variable selection and multinomial model with survey analysis identify most important explanatory variables under specific market conditions. The index futures trading volume, along with bid-ask spread, identify extreme values of the underlying equity index returns. Further, the Markov Chain Monte Carlo (MCMC) model uncovers change points in the non-monotonic relationship between futures liquidity and the equity index returns, and identifies conditions leading to expected negative returns.

Cross-Sectional Variation of Intraday Liquidity, Cross-Impact, and Their Effect on Portfolio Execution

Over the past decade, there has been a significant rise in assets managed under passive and systematic strategies. Such strategies hold and trade portfolios in a coordinated manner, often concentrating trading around the end of the trading session. Simultaneously, there has been a rise in activity from market participants that act as liquidity providers, themselves trading along portfolio directions. In “Cross-Sectional Variation of Intraday Liquidity, cross-impact, and Their Effect on Portfolio Execution,” Min, Maglaras, and Moallemi investigate the implications of these two observations, specifically exploring how the phenomenon of portfolio liquidity provision leads to cross-security impact and influences the optimal execution schedules of risk-neutral traders that seek to minimize their expected execution costs. They show that the optimized schedules deviate from the naïve approach that trades each security separately and instead, couple the trading intensity across stocks so as to benefit from the liquidity provided along attractive portfolio trading directions. Empirical analysis demonstrates that coupled optimized schedules could lower costs by as much as 15% relative to the naïve approach.

Commonality in intraday liquidity and multilateral trading facilities: Evidence from Chi-X Europe

This paper examines the effects of Chi-X, a pan-European multilateral trading facility, on intraday liquidity co-movements within European equity markets. Chi-X enables simultaneous trading of all European equities on a single trading platform. Further, it induces an increase in multi-market trading between Chi-X and the home exchange, connecting individual markets in a single network. Greater market consolidation combined with an increase in multi-market trading should induce stronger network-wide liquidity co-movements. Consistent with our predictions, we find that Europe-wide liquidity co-movements increase after the Chi-X entry. The increase is stronger in down markets and for stocks with more intense trading on Chi-X.

ОСУЧАСНЕННЯ ТА МОДЕРНІЗАЦІЯ СИСТЕМИ ЕЛЕКТРОННИХ ПЛАТЕЖІВ НАЦІОНАЛЬНОГО БАНКУ УКРАЇНИ ЗА ЄВРОПЕЙСЬКИМ ДОСВІДОМ У КОНТЕКСТІ ГЛОБАЛІЗАЦІЙНИХ ПРОЦЕСІВ

На сьогодні для Системи електронних платежів Національного банку України актуальною є модернізація та осучаснення відповідно до реальних потреб учасників платіжної системи в умовах сучасної економічної ситуації в Україні. Для вдосконалення форм міжбанківських розрахунків важливою є перебудова національної платіжної системи відповідно до міжнародних стандартів і стандартів ЄС.
 Проведено аналіз функціонування платіжної системи ТАРГЕТ2, розкрито її переваги і принципи організації. Проведено порівняльний аналіз платіжних систем ТАРГЕТ2 та системи електронних платежів Національного банку, а також надано рекомендації щодо вдосконалення вітчизняної платіжної системи на основі досвіду Європейського Союзу.
 Система електронних платежів НБУ є досить сучасною та ефективною, але існування певного часу у проходженні платежу, недостатньо високий рівень нормативного та інформаційного забезпечення учасників системи електронних платежів та її контролю призводять до можливості непрозорих фінансових операцій у самій системі.
 В Україні технологічний рівень розрахункової системи НБУ не зовсім дозволяє якісно використовувати більшість із засобів підтримки внутрішньоденної ліквідності, що є значним недоліком СЕП у порівнянні з її зарубіжним аналогом — ТАРГЕТ2.
 Аналіз функціонування ТАРГЕТ2 та СЕП надав змогу більш детально розглянути позитивні і негативні моменти обох платіжних систем.
 Значною перевагою ТАРГЕТ2 є система управління ліквідністю, що за певних умов є дієвим інструментом при плануванні розрахункових операцій. Це дозволяє учасникам системи попереджувати виникнення проблем під час розрахунків та ефективно розв’язувати їх. Оптимізація управління ліквідністю у СЕП є незначною.
 Національний банк України, на відміну від Європейського центрального банку, надає інформацію стосовно СЕП не в повному обсязі, що свідчить про закритість платіжної системи та неготовність НБУ забезпечувати максимально прозорий механізм розрахунків.
 На сьогодні система розрахунків ТАРГЕТ2 є більш сучасною та відкритою у порівнянні із Cистемою електронних платежів НБУ.

Monitoring intraday liquidity risks in a real-time gross settlement system

We propose an intraday liquidity risk indicator (LRI) for each participant in a realtime gross settlement system (RTGS). The LRI is constructed by comparing the evolution of the expected intraday liquidity sources used by a participant for settling payments with the evolution of that participant’s expected intraday liquidity requirements in the remainder of the payment day. Using the data from Canada’s RTGS-equivalent payment system, the large-value transfer system (LVTS), to evaluate the forecasting performance of the LRI, we find that it performs reasonably well. Further, based on the LRI, we propose an early warning indicator (EWI) that can predict the likelihood of an intraday liquidity risk event occurring in the remainder of the payment day. Both the LRI and EWI are applied to monitor intraday liquidity risks for participants in the LVTS. The empirical results suggest that the participants manage their intraday liquidity positions well, allowing them to meet payment and settlement obligations on a timely basis, which contributes to the smooth functioning of the LVTS.

How much liquidity would a liquidity-saving mechanism save if a liquidity-saving mechanism could save liquidity? A simulation approach for Canada’s large-value payment system

Canada’s Large Value Transfer System (LVTS) is in the process of being replaced by a real-time gross settlement (RTGS) system. A pure RTGS system typically requires participants to hold substantial amounts of intraday liquidity in order to settle their payment obligations. Implementing one or more liquidity-saving mechanisms (LSMs) can reduce the amount of liquidity that participants need to hold. This paper investigates how much liquidity requirements can be reduced with the implementation of different LSMs in the Financial Network Analytics simulation engine using LVTS transaction data from 2018. These LSMs include (1) bilateral offsetting, (2) FIFO–bypass, (3) multilateral offsetting and (4) a combination of all LSMs. We simulate two different scenarios at varying levels of the upper bound of liquidity. In the first scenario, all payments from Tranche 1, which are considered time critical, are settled in a pure RTGS payment stream, while less time-critical Tranche 2 payments are settled in a payment stream with LSMs. In the second scenario, we settle all payments (Tranches 1 and 2) in the LSM stream. Our results show that when there is ample liquidity available in the system, there is minimal benefit from LSMs, as payments are settled without much delay: the effectiveness of LSMs increases as the amount of intraday liquidity decreases. A combination of LSMs shows a reduction in liquidity requirements that is larger than any one individual LSM.

Monitoring Liquidity Management of Banks With Recurrent Neural Networks

Monitoring liquidity management of banks is one of the prime tasks of central banks. A bank that manages its liquidity inadequately can severely harm its liquidity position and potentially threaten the stability of the entire financial system. Central banks try to anticipate these risks by carefully monitoring the liquidity management of banks in large-value payment systems (LVPSs). Typically, they do this based on statistical methods in which various risk indicators related to the liquidity usage of banks are calculated from the transaction log of an LVPS. These indicators need to be manually analyzed by payment experts to find irregularities that could signal potential risks. Although statistical methods provide much insight into the liquidity management of banks, they do not scale well to the large number of banks that are subject to risk monitoring and the high velocity by which payments are nowadays settled. In this paper, we investigate whether the liquidity management of banks can be monitored more efficiently by anomaly detection. We construct different probabilistic classifiers that classify delta sequences of banks by the corresponding bank. A delta sequence captures the change in the liquidity position of a bank in an LVPS throughout a given day. Accordingly, anomalies in the intraday liquidity usage of banks are detected by determining whether the classifiers misclassify recent delta sequences that were not used to train the classifiers. Our results show that recurrent neural networks are well suited to perform this classification task and detect many irregularities in payment behavior that are interesting for the supervisors and operators of an LVPS.

Chile

The BCCh is considering broadening access to its services beyond commercial banks and some Financial Market Infrastructures (FMIs). The services include settlement accounts, intra-day liquidity, standing deposit and lending facilities, and eligibility for ELA. Banks have always had access to these services, while Central Counterparties (CCPs) and the Securities Settlement System (SSS) were granted access to a settlement account in 2009. The BCCh is considering extending its services to various types of Nonbank Financial Institutions (NBFIs) to enable it to more closely manage and mitigate financial stability risks.