Trade Size Research Articles

Inventory, market making, and liquidity in OTC markets

We develop a search-theoretic model of a dealer-intermediated over-the-counter market. Our key departure from the literature is to assume that, when a customer meets a dealer, the dealer can sell only assets that it already owns. Hence, in equilibrium, dealers choose to hold inventory. We derive the equilibrium relationship between dealers' costs of holding assets on their balance sheets, their optimal inventory holdings, and various measures of liquidity, including bid-ask spreads, trade size, volume, and turnover. Using transaction-level data from the corporate bond market, we calibrate the model to quantitatively assess the impact of post-crisis regulations on dealers' inventory costs, liquidity, and welfare.

Antimicrobial Photodynamic Therapy: Novel Concept for Foodborne Pathogens

Changes in agricultural practices, individual diversity, the considerable size of the global food trade, immigrant and tourist circulation, with microorganism transformations have led to the formation of microorganisms that are resistant to chemicals and implementations used, especially antibiotics. Antimicrobial photodynamic therapy (aPDT) is an approach based on the interaction of a natural/synthetic photosensitizer, a suitable light source, and molecular oxygen, and the cytotoxic effect of reactive oxygen species resulting from this interaction on the target microorganism. The benefits of this method, which has found its place in medical terms by treating oral biofilms, superficial lesions, and chronic sinusitis, are limited by problems of low cell/tissue penetration, poor selectivity, non-thermal effect, and off-target damage. Despite similar practical problems in food science, developing technology is expected to encourage new studies on pathogen inactivation in food matrices, reducing the microbial load to safe levels, extending shelf life, and preventing quality loss.

Transaction Costs and Capacity of Systematic Corporate Bond Strategies

Can systematic corporate bond investments generate attractive returns net of costs? To answer this question, we apply the principle of market microstructure invariance and obtain bond transaction costs increasing in trade size. As the size of the bond fund increases, the market impact reduces net returns to zero. High-turnover strategies hit capacity constraints fast. Low-turnover credit risk–focused strategies have much higher capacities that can be further increased by constraining portfolio rebalancing in realistic ways. Transaction costs do not absorb the corporate bond risk premium even in the largest possible market portfolios.

Exploring the endogenous structure and evolutionary mechanism of the global coal trade network

The uneven distribution of global coal supply and demand markets has driven coal trade. Effectively characterizing the global coal trade pattern and exploring its evolutionary mechanisms are important for economic development and international energy security. Therefore, this study adopts complex network methods to construct global coal trade network (GCTN) from 1995 to 2021. Based on exploring the overall, individual, and motif structural characteristics of the network, the temporal exponential random graph model is adopted to explore the impact mechanism of endogenous and exogenous variables on the evolution of the GCTN. The research findings demonstrate that (1) at the overall level, the network size, closeness, accessibility, and reciprocity of global coal trade exhibit an increasing trend; (2) at the motif level, aggregation and bilateral reciprocity are the primary trade patterns that affect the formation and evolution of the GCTN that is different from the steady-state structures of the four common super-families and possesses unique characteristics; (3) at the individual level, the United States and European economies possess a higher degree of diversification in coal trade, while Australia and emerging economies exhibit higher coal export trade volumes. The RCEP economies, represented by Japan and South Korea, possess a higher import share. Additionally, the Netherlands plays a “transit station” role in the network; (4) the formation and evolution of the GCTN are influenced by endogenous mechanisms. Reciprocity, transmission closure, and convergence effects have a significant promoting effect on network construction. Ignoring endogenous mechanisms can lead to significant bias in empirical results.

Utilization Schemes of the Pre-Settlement Risk Limits

The purpose of the article is to investigate the selected method employed to manage the counterparty credit risk, namely the application of various risk limits. The aim is to recognize utilization schemes of the pre-settlement risk limits in the Polish OTC derivatives market in the relationship between a financial institution and a non-financial counterparty. They are used not only to cover the credit exposure but also to support and enhance the entire market risk management process and day-to-day operations in the financial institutions. Methodology. The research method comprises the analysis of recommendations of the Polish Financial Supervision Authority as well as reports, documents and market risk management principles of selected financial institutions (WSE listed banks). Results of the research. The study indicates two utilization schemes of the pre-settlement limit setup applicable both for daily and credit-related transactions. The first one assumes that the risk requirements remain unchanged during the contract lifetime, the second one considers variable risk requirements over time. Practical implications are discussed (in relation to a notional trade size, risk exposure and margining policy).

Penalty shootouts and bitcoin trading

ABSTRACT Soccer is the most popular sport in the world, and bitcoin is a global asset. Penalty shootouts represent an important stage in a soccer match and generate an enormous amount of public interest and attention. Bitcoin trading experiences a significant drop in volume and volatility during penalty shootouts at major international soccer tournaments. After the conclusion of penalty shootouts, the intensity of bitcoin trading exhibits a swift and a strong rebound. Significant fluctuations in trading volume and volatility of bitcoin around penalty shootouts are primarily driven by the variation in number of trades rather than in trade size.

Asymptotic Methods for Transaction Costs

We propose a general approximation method for the determination of optimal trading strategies in markets with proportional transaction costs, with a polynomial approximation of the residual value function. The method is exemplified by several problems, from optimally tracking benchmarks and hedging the log contract to maximizing utility from terminal wealth. Strategies are also approximated by practically executable, discrete trades. We identify the necessary trade-off between the trading frequency and trade size to ensure satisfactory agreement with the theoretically optimal, continuous strategies of infinite activity.

Liquidity provision and trading skill: Evidence from mutual funds' daily transactions

AbstractExamining risk‐adjusted returns for executed trades over horizons of up to 1 year, we document strong evidence of short‐term trading skill using daily mutual fund transactions from Finland. We find that trading performance is highly persistent up to the 1 month horizon, with an annualized Carhart abnormal return of 5.03% observed for both buys and sells. Moreover, the returns observed for the first week account for almost 36% of a fund's 1 year trade return, underscoring the significance of short‐term trading in mutual funds. For the best‐performing funds, this short‐term performance also translates into sustained long‐term outperformance. Investigating possible sources, we find that liquidity provision, rather than price pressure, is a significant contributor. In addition, short‐term trading performance is significantly positively related to trade size, fund size, and expenses, depending on whether buys or sells are considered.

Direct Evidence of Bitcoin Wash Trading

We use the internal trading records of a major Bitcoin exchange leaked by hackers to detect and characterize wash trading—a type of market manipulation in which a single trader clears the trader’s own limit orders to “cook” transaction records. Our finding provides direct evidence for the widely suspected “fake volume” allegation against cryptocurrency exchanges, which has so far only been backed by indirect estimation. We then use our direct evidence to evaluate various indirect techniques for detecting the presence of wash trades and find measures based on Benford’s law, trade size clustering, lognormal distributions, and structural breaks to be useful, whereas ones based on power law tail distributions to give opposite conclusions. We also provide suggestions to effectively apply various indirect estimation techniques. This paper was accepted by Professor Bruno Biais, finance. Funding: J. Li acknowledges support by the U.S. Department of Homeland Security [Grant 205187] through the Criminal Investigations and Network Analysis Center. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2021.01448 .

Maximum order size and market quality: Evidence from a natural experiment in commodity futures markets

AbstractWe exploit a 2018 exchange‐mandated increase of the maximum order size in some—but, crucially, not all—US agricultural futures markets, to link exogenous constraints on order placement and execution, price volatility, and market liquidity. The old maximum size of 2500 contracts was binding: demand exists for placing and executing much larger orders. Limit‐order book depth at the best bid and ask increases dramatically after the exchange quadruples the maximum order size. Amid relatively stable volatility, bid‐ask spreads narrow, and the price impact of large trades falls. In sum, we find that market quality can improve after an increase in maximum order and trade size.

Does trade still follow the “flag”? Evidence from the partnership and bilateral trade in China

Partnership is a typical “Flag” of China’s foreign relations, playing a significant role in promoting bilateral trade. This study examines the impact and mechanism of China’s partnerships on trade with empirical evidence, revealing that establishing a partnership increases bilateral trade by 25%; each level-up of the partnership will lead to a 6.8% increase in bilateral trade, with a dynamic impact lasting about five years. Partnership building mainly impacts bilateral trade through political interaction, bilateral investment, and cultural exchange between two countries, with cultural exchange playing a dominant role in the mechanism. Strengthening partnerships with Asia-Pacific, Latin America, African countries, low-income, and low trade size countries can create more potent bilateral trade effects. Furthermore, higher levels of partnership have an exemplary effect, bringing a positive spatial spillover effect on trade. This study affirms the significant role of partnership in foreign relations and trade, providing valuable insights to reduce trade risk and achieve high-quality development.

Informed trading and cryptocurrencies. New evidence using tick-by-tick data

Do trade size preferences exist in cryptocurrencies? Using high-frequency tick-by-tick data of cryptocurrencies, we examine what trade sizes contribute to daily cumulative price changes, viz. small, medium, and large. We employ robust estimations and document the presence of informed trading in the cryptocurrency asset class, and this is specifically translated via medium and small trades. We provide evidence to support the presence of stealth trading in cryptocurrencies. Our results contradict the prevailing view that informed trades in the cryptocurrency market occur via large trades.

Foreign investors and stealth trading: An examination of price movements in developing markets

We investigate whether foreign investors have better information than domestic investors. We are motivated by (1) the controversy over the performance of foreign versus domestic investors and (2) market dynamics that require investors to adapt constantly. Using 123 positive and 81 negative news items from the Indonesia Stock Exchange (IDX), we find that foreign investors account for larger price movements before news announcements, suggesting that foreign investors tend to have better information than domestic investors. The result is robust, even after including the total trading volume, total number of transactions, and trading size. Further investigation reveals that foreign investors' small trades account for the largest price movements. Initiated trades account for larger price movements. Domestic investors have more foreign advantages than foreign investors. We also find that the foreign advantage disappears during non-event periods. Our results contrast with previous findings showing that domestic investors have better information than foreign investors. Our findings suggest that investor behavior is dynamic; investors adjust to their environment, which may lead to changes in their performance.

Exploring the Relation between Realised Volatility and Trading Volume: Evidence from International Stock Market

Objective: The sequential information theory and mixed distribution hypothesis contends that there exists a bi-directional relation between realised volatility and trading volume. This position has led to the proposition that new information spreads sequentially and reaches market participants at varying times. The purpose of this study was to re-examine these theories. Research Design & Methods: A Granger causality test, Mean Square Error and Mean Average error models were applied to investigate the relationship between realised volatility and trading volume for a sample of five international stock markets from March 5, 2018, to March 5, 2023. Findings: The findings of this study contradict the proposition put forth by the sequential information theory and mixed distribution hypothesis where no meaningful relationship was observed between realised volatility and trading volume except for the CAC 40. Hence, new information rather filters through financial markets at the same time. This finding maybe the explanation for the ever-increasing financial contagion between financial markets. Contribution & Value Added: Traders may need to rely on other indicators and adjust their strategies to incorporate different signals or factors that are more relevant for predicting or identifying market movements. It may become more challenging to gauge the liquidity conditions in the market based solely on volatility. Market participants may need to rely on other liquidity indicators, such as bid-ask spreads, order book depth, or trade size distribution, to assess market liquidity.

Stochastic Liquidity as a Proxy for Nonlinear Price Impact

For the “In This Issue” column: Trading costs play a central role in designing and implementing quantitative trading strategies. To quantify trading costs, optimal execution and trading algorithms rely on price impact models, such as the propagator model. Empirically, price impact is concave in trade sizes, leading to nonlinear models for which optimization problems are intractable and even qualitative properties, such as price manipulation, are poorly understood. This paper shows that, in the diffusion limit of small and frequent orders, the nonlinear model converges to a tractable linear model. In this high-frequency limit, a stochastic liquidity parameter approximates the original impact function’s nonlinearity. This allows us to derive simple formulas for optimal trading strategies and sharp conditions on market volumes to rule out price manipulation. A detailed empirical study using high-frequency limit-order data illustrates the practical performance of the theoretical results.

The Impact of Logistics Efficiency and FTAs on International Trade: The Experience of G-20 Countries

Purpose - The purpose of this study is to analyze the impact of logistics efficiency and Free Trade Agreements (FTAs) on trade between South Korea and G-20 countries, and derive policy implications based on the analysis results.
 Design/Methodology/Approach - In this study, we analyze the impact of logistics efficiency and FTAs on trade using the gravity model, which is a model that explains the ‘normal’ size of trade between nations. This study adopts varying coefficient models, such as the random effects model and fixed effects model in order to more effectively analyze unobservable factors in the panel data. The results of the Hausman test suggest that a fixed effects model is appropriate.
 Findings - The estimated coefficient for the FTA variable is 0.124, and it is statistically significant at the 1% significance level. The estimated coefficient for the logistics efficiency variable is positive (+) and statistically significant. South Korea’s estimated logistics efficiency coefficient is 1.191, which is significant at the 10% significance level, and the estimated coefficient for the trading partner’s logistics efficiency is 0.619, which is also significant at the 10% significance level.
 Research Implications - In order to increase a country’s trade volume, it is necessary not only to improve its own logistics efficiency but also to enhance the logistics systems of its trading partners. Furthermore, since the implementation of FTAs is expected to have a positive impact on trade expansion, there is a need to be more proactive in pursuing FTA agreements with non-signatory countries.

Global financial crisis, funding constraints, and liquidity of VIX futures

We explore the effect of funding constraints on the trading costs of VIX futures. With an increase in funding constraints during a crisis (non-crisis) period, we observe a corresponding increase (decrease) in the proportional effective spread, quoted spread, order cost, asymmetric information, and trade sizes. The leveraged traders play a possible channel in the relationship between funding constraints and trading costs. When leveraged traders face scarce capital during a crisis (non-crisis) period, they increase (decrease) their net long positions to increase (decrease) the hedging pressure that leads to an increase (decrease) in trading costs that decreases (increases) the liquidity.

Transformation of the Logistics Infrastructure of the Russian Market E-Commerce

The growth of the e-commerce market in the last decade has caused a radical change in the logistics infrastructure serving this market. The transformation of the sector resulted both in the growth of quantitative indicators of the industry (the scale of domestic and international transportation, the number of shipments), and in qualitative changes (the emergence of multi-format logistics intermediaries, the development of new categories of logistics intermediaries, the strengthening of the role of marketplaces). The purpose of study is to assess the trends in the development of the logistics infrastructure of the e-commerce market, to determine the factors that determine the change in the industry in the new economic conditions. The information base of the study was the data of statistical reporting and analytical reviews of the industry. The object of the study is the logistics infrastructure of the Russian e-commerce market. The scientific novelty of the work lies in the systematization of the factors that determine the development of the infrastructure of the market in question. The prospects for the development of the e-commerce market in the context of limited economic growth and a decrease in real incomes of the country's population, sanctions restrictions that reduce the size of cross-border trade and the possibility of cooperation with Western logistics companies have been studied. The dependence of the development of the Internet sales sector on general economic processes, the level of penetration of the Internet among Russian consumers is considered. The parameters of the transformation of the logistics infrastructure are determined by the general state of the country's economy, the prospects for the development of logistics technologies and marketing solutions. At the same time, the logistics infrastructure and online commerce have a mutually positive impact on each other, causing both quantitative changes (in terms of increasing the number of purchases made, expanding the geography of deliveries, reducing the timing of online orders) and qualitative changes (improving the quality of service for participants market, the emergence of new types of logistics intermediaries).

Yasadışı tütün ticaretinin bir analizi: idari yaptırım ve yüksek vergilendirmenin etkinliğinin yasa dışı ticaret üzerindeki etkisi

Even though tobacco products are commonly legal substances, the illicit tobacco trade is one of the largest among other illegal products and services. Although high taxation is often blamed for the development of illicit tobacco trade, it is the strength and efficiency of the regulatory framework that should form the focus attention when investigating the control of illicit trade. This secondary based research aims to analyse the relationship between the estimated size of illicit tobacco trade and the strength of enforcement, together with the influence of taxation on illicit tobacco trade. The results demonstrate that the size of illicit tobacco trade tends to be smaller where countries have strong enforcement capability. Moreover, countries with strong enforcement capability can also increase taxation on tobacco products while suppressing the development of illicit tobacco trade. Finally, as illicit tobacco products are mainly traded across borders, the weak law enforcement of some governments can undermine the international effort to eradicate illicit tobacco trade.

Does the Federal Reserve Obtain Competitive and Appropriate Prices in Monetary Policy Implementation?

Abstract Many of the Federal Reserve’s (the Fed’s) monetary policy operations involve trading with primary dealers. We find that, for agency MBS, dealers charge 2.5 cents (per $100 face value) higher selling to the Fed than to non-Fed customers. Controlling for the same dealer, same security, and same trading time, this discriminatory pricing likely arises from dealers’ market power rather than inventory costs. Further, matching trade size reduces the price differential by more than half, implying that dealers’ market power greatly relates to the Fed’s purchases in large amounts, whereas the Fed’s limited breadth of counterparty choice also plays some role.