Market Design Changes Research Articles

The Effects of Algorithmic Trading on Security Market Quality

Notwithstanding that regulatory mandates require that all security market design changes pass the dual test of fairness and efficiency, most regulators have not even defined efficiency let alone fairness. It should therefore come as little surprise why design changes such as the introduction of algorithmic and high frequency trading or dark pools are causing considerable controversy in the marketplace. There is no evidence-based policy framework within which such changes can be meaningfully evaluated. In this work we seek to develop a Market Quality Framework in which as a start both fairness and efficiency are defined. From these definitions we establish a series of empirical proxies. Thereafter, we develop a systems estimation model and demonstrate its use by analyzing the 2004-2011 explosive growth in algorithmic trading (AT) on the London Stock Exchange and NYSE Euronext Paris. Our results show that greater AT increases market fairness and efficiency but only in top quintile stocks. We address the robustness of these results to end-of-quarter reporting deadlines and to trading before and after MiFID1, a 2007 regulatory regime that fragmented the market. In addition, we analyze the over-identifying restrictions, and perform both Hausman and Stock-Yogo tests of the exogeneity and strength of our AT instruments.

An international trend in market design: Endogenous effects of limit order book transparency on volatility, spreads, depth and volume

Following other leading international securities markets, the Tokyo Stock Exchange (TSE) has adopted a publicly displayed but anonymous limit order book, and we ask: how is market quality affected? Accounting for fixed effects and endogeneity, we find increased volatility and higher order book depth at the best bid and ask prices, while total depth is not significantly impacted. This predicts more competitive order strategies in a trading system with anonymous orders but with more visible price levels. Spreads are found to be unaffected by the market design change, in contradiction to previous literature. Complementing the literature, we find volume increases, indicating that the aggregate effect of the design change is positive.

Earnings announcements and attention constraints: The role of market design

We identify a new channel – market makers' attention constraints – through which earnings announcements for one stock affect the liquidity of other stocks. When some stocks handled by a designated market maker have earnings announcements, liquidity is lower for non-announcement stocks handled by the same market maker, with the largest effects coming from earnings surprises and stocks with high earnings response coefficients. Half of the liquidity decline reflects attention constraints binding on the individual market maker, and the other half is explained by the market maker's inventory. We further find that a market design change that increases automation alleviates the liquidity effect of attention constraints, despite an increase in the number of stocks allocated to each market maker.

A survey of critical research areas in the energy segment of restructured electric power markets

Availability of a large volume of recent literature on deregulated (a.k.a. restructured) electricity markets underscores the importance of the research needs to ensure proper design and functioning of the markets. Researchers have made significant contributions fueling the evolution of the fundamental market design changes that have taken place since the beginning of the restructuring process. Due to the vast scope, existing survey papers are focused on particular facets of deregulated electricity markets. We adopt a similar approach by focusing on the most important research areas related to the energy market. The contributions of the survey paper lie in the novel approach used in classifying the literature based on critical research areas. Some areas of research such as auction based pricing, bidding strategy formulation, market equilibria, and market power are reviewed in a different light than other existing survey papers. We conclude by providing some future research directions for the energy markets.

Earnings Announcements and Attention Constraints: The Role of Market Design

We identify a new channel – market makers’ attention constraints – through which earnings announcements for one stock affect the liquidity of other stocks. When some stocks handled by a designated market maker have earnings announcements, liquidity is lower for non-announcement stocks handled by the same market maker, with the largest effects coming from earnings surprises and stocks with high earnings response coefficients. Half of the liquidity decline reflects attention constraints binding on the individual market maker, and the other half is explained by the market maker's inventory. We further find that a market design change that increases automation alleviates the liquidity effect of attention constraints, despite an increase in the number of stocks allocated to each market maker.