Hot Topics in Market Microstructure…
Rotman Distinguished Lecture Series
March 2008
Ingrid M. Werner
Martin and Andrew Murrer Professor of Finance
Fisher College of Business, The Ohio State University
Hot Topics in Market Microstructure!
• Liquidity Risk and Asset Pricing
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Lee (2006) international evidence, comparing measures…
Chen (2005) comparing measures…
Wu, He, Li, and Wang (2006) US Gov Bond market…
New markets
Better measures
• Liquidity Risk and Optimal Trading Strategies
– Bertsimas and Lo (2002) optimal control of execution costs
– Almgren (2004) optimal executions with non-linear impact functions and
trading induced risk
– Not much work done
– People working in this area tend to end up in industry…
Hot Topics in Market Microstructure!
• Distressed markets
– Brunnermeier and Pedersen (2005) predatory trading
– Carlin, Lobo, and Viswanathan (2007) cooperative and predatory
trading
– Important these days!
• Limits to arbitrage
– Mitchell, Pulvino, and Stafford (2002) value < sum of parts…
– Chen, Stanzl, and Watanabe (2005) trading costs wipes out anomalies
– Room for more work here!
• Retail trading
– Barber and Odean…
– Seru, Shumway, and Stoffman (2007) learning by trading
– Still lots to learn!
Hot Topics in Market Microstructure!
• Institutional changes
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New trading platforms (Hybrid)
New features of existing platforms (Open/Close)
New markets/competitors (BATS)
Dynamic area
Effects on trading costs
Effects on market efficiency
• Regulatory changes
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Reg SHO
Reg NMS
MIFIT
I am sure there will be more to come
Need to be fast though…
Hot Topics in Market Microstructure!
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Dark pools
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We know very little
Data is hard to come by…
Proprietary datasets
Effect on displayed liquidity
Effect on market efficiency
Effect on trading costs
Algorithmic trading
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We know very little
Data is hard to come by…
Proprietary datasets
Effect on displayed liquidity
Effect on market efficiency
Effect on trading costs
AFA Meetings 2008
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Market Making
Hendrik Bessembinder, University of Utah
Michael J. Fleming , Federal Reserve Banks and Joshua V. Rosenberg , Federal Reserve Banks How do Treasury Dealers Manage their Positions?
Abstract and Article
Albert J. Menkveld , Free University of Amsterdam - Designated Market Makers for Small-Cap
Stocks
Abstract and Article
Dan Li , Board of Governors of the Federal Reserve System - Rounding as Discrimination - Price
Clustering in the OTC Tax-Exempt Bond Market
Abstract and Article
Terrence Hendershott , University of California, Berkeley, Pamela C. Moulton , Fordham University
and Mark S. Seasholes , University of California, Berkeley - Market Maker Inventories and
Liquidity
Abstract and Article
Discussants:
Pradeep Yadav , University of Oklahoma
Kumar Venkataraman , Southern Methodist University
Amy Edwards , Securities and Exchange Commission (SEC)
Marios Panayides , University of Utah
AFA Meetings 2008
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Volume and Liquidity
Jennifer Huang, University of Texas at Austin
Daniel Dorn , Drexel University and Gur Huberman , Columbia University Turnover and Volatility
Abstract and Article
Timothy C. Johnson , London Business School - Volume, Liquidity, and
Liquidity Risk
Abstract and Article
Marzena J. Rostek , University of Wisconsin - Madison and Marek Weretka
, University of Wisconsin - Madison - Frequent Trading and Price Impact in
Thin Markets
Abstract and Article
Discussants:
Bing Han , University of Texas at Austin
Arvind Krishnamurthy , Northwestern University
Dimitri Vayanos , London School of Economics & Political Science (LSE)
AFA Meetings 2008
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Information and Trade
Christine Parlour, University of California, Berkeley
Paolo Colla , University of Bocconi and Antonio Mele , London School of
Economics & Political Science (LSE) - Information Linkages and Correlated
Trading
Abstract and Article
Nevzat Eren , University of Minnesota - Twin Cities and Han N. Ozsoylev ,
University of Oxford - Hype and Dump Manipulation
Abstract and Article
Alex Boulatov , University of Houston and Thomas J. George , University of
Houston - Securities Trading when Liquidity Providers are Informed
Abstract and Article
Discussants:
Johan Walden , University of California, Berkeley
Bilge Yilmaz , University of Pennsylvania
Ioanid Rosu , University of Chicago
AFA Meetings 2008
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Insider Trading, Arbitrage and Trader Identity
Tarun Chordia, Emory University
Utpal Bhattacharya , Indiana University Bloomington and Hazem Daouk , Cornell
University - When No Law is Better Than a Good Law
Abstract and Article
Ben R. Marshall , Massey University, Sirimon Treepongkaruna , Australian National
University and Martin R. Young , Massey University - What Level of Compensation is
Available to Arbitrageurs in the Foreign Exchange Market?
Abstract and Article
Juhani Linnainmaa , University of Chicago - Does it Matter Who Trades? Broker
Identities and the Information Content of Stock Trades
Abstract and Article
Discussants:
Arturo Bris , IMD International
Jun Liu , University of California, San Diego
Gideon Saar , Cornell University
NBER Working Papers MM
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2008
w13848 Bruce Lehmann Arbitrage-free: Limit Order Books and the Pricing of Order
Flow Risk
w13825 Yacine Ait-Sahalia, Jialin Yu: High Frequency Market Microstructure Noise
Estimates and Liquidity Measures
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2007
w13625 Zhi Da, Pengjie Gao, Ravi Jagannathan: Informed Trading, Liquidity
Provision, and Stock Selection by Mutual Funds
w13530 Alvin E. Roth: What Have We Learned From Market Design?
w13445 Richard G. Frank, Richard J. Zeckhauser: Custom Made Versus Ready to
Wear Treatments; Behavioral Propensities in Physician's Choices
w13225 Alvin E. Roth: Deferred Acceptance Algorithms: History, Theory, Practice,
and Open Questions
w12939 Markus K. Brunnermeier, Lasse Heje Pedersen: Market Liquidity and
Funding Liquidity
w12933 Eugene N. White: The Crash of 1882, Counterparty Risk, and the Bailout of
the Paris Bourse
w12887 Nicolae B. Garleanu, Lasse H. Pedersen: Liquidity and Risk Management
w12877 Mark Mitchell, Lasse Heje Pedersen, Todd Pulvino: Slow Moving Capital