Stalking the "Efficient Price" in Market Microstructure Specifications: An Overview

The principle that revisions to the expectation of a security's value should be unforecastable identifies this expectation as a martingale. When price changes can plausibly be assumed covariance stationary, this in turn motivates interest in the random walk. In the presence of the market frictions featured in many microstructure models, however, this expectation does not invariably coincide with observed security prices such as trades and quotes. Accordingly, the random walk becomes an implicit, unobserved component. This paper is an overview of econometric approaches to characterizing this important component in single- and multiple-price applications

Evidence of in-play insider trading on a UK betting exchange

International audienceAn open question in market microstructure is whether 'informed' traders have an advantage due to access to private, inside, information; or due to a superior ability to process public information. In this paper we attempt to answer this question with data from a sports betting exchange taken during play. Uniquely, this allows us to time-stamp information events to the nearest second, and to ensure we are observing all relevant information regarding the value of an asset. We find evidence of inside information but not of a superior ability to process public information. The first finding suggests that a subset of the betting population are observing the action before the wider public (possibly due to delays in the television signal), and betting using this informational advantage

Securities trading in the absence of dealers: Trades and quotes on the Tokyo Stock Exchange

This paper investigates the behavior of intraday trades and quotes for individual stocks on the Tokyo Stock Exchange (TSE). The TSE has two distinctive institutional features: (1) the absence of market makers who trade for their own accounts, and (2) use of price limits. Our findings suggest that the immediacy available in the market is high, despite the reliance on public limit orders to supply liquidity. The price limit mechanism causes some trades to execute more slowly, but allows many incoming market orders to transact at more favorable prices. We furthermore examine the impact of trades on quotes. The TSE's mechanism is similar in many respects to the electronic limit order book modeled by Glosten (1991). Consistent with Glosten's prediction, we find some evidence for quote reversals subsequent to trades

The Price Impact of Order Book Events

We study the price impact of order book events - limit orders, market orders and cancelations - using the NYSE TAQ data for 50 U.S. stocks. We show that, over short time intervals, price changes are mainly driven by the order flow imbalance, defined as the imbalance between supply and demand at the best bid and ask prices. Our study reveals a linear relation between order flow imbalance and price changes, with a slope inversely proportional to the market depth. These results are shown to be robust to seasonality effects, and stable across time scales and across stocks. We argue that this linear price impact model, together with a scaling argument, implies the empirically observed "square-root" relation between price changes and trading volume. However, the relation between price changes and trade volume is found to be noisy and less robust than the one based on order flow imbalance

Securities trading in the absence of dealers: Trades and quotes on the Tokyo Stock Exchange

This paper investigates the behavior of intraday trades and quotes for individual stocks on the Tokyo Stock Exchange (TSE). The TSE has no designated market makers and is further distinguished by daily and intraday price limits and conversion to limit orders of market order portions that exceed the size of the current quote. We examine the transaction and quote record for three firms for the first three months of 1990. Our findings suggest that the immediacy available (at least for small trades) in the market is high, despite the reliance on public limit orders to supply liquidity. When orders that would otherwise walk through the limit order book are converted into limit orders, execution is delayed, but some orders execute (at least in part) at more favorable prices. Holding order size constant, orders that are delayed in this fashion appear to have a larger information content. Finally, as a consequence of limit order cancellation and autocorrelation in arriving orders, the bid (offer) quote tends to deteriorate further after a sale (purchase)

Common Factors in Prices, Order Flows and Liquidity

How important are cross-stock common factors in the price discovery/liquidity provision process in equity markets? We investigate two aspects of this question for the thirty Dow stocks. First, using principal components and canonical correlation analyses we find that both returns and order flows are characterized by common factors. Commonality in the order flows explains roughly half of the commonality in returns. Second, we examine variation and common covariation in various liquidity proxies and market depth (trade impact) coefficients. Liquidity proxies such as the bid-ask spread and bid-ask quote sizes exhibit time variation which helps explain time variation in trade impacts. The common factors in these liquidity proxies are relatively small, however

Price discovery and trade fragmentation in a multi-market environment: Evidence from the MTS system

This is the post-print version of the final paper published in Journal of Banking and Finance. The published article is available from the link below. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. Copyright @ 2012 Elsevier B.V.This paper proposes new metrics for the process of price discovery on the main electronic trading platform for euro-denominated government securities. Analysing price data on daily transactions for 107 bonds over a period of 27 months, we find a greater degree of price leadership of the dominant market when our measures (as opposed to the traditional price discovery metrics) are used. We also present unambiguous evidence that a market’s contribution to price discovery is crucially affected by the level of trading activity. The implications of these empirical findings are discussed in the light of the debate about the possible restructuring of the regulatory framework for the Treasury bond market in Europe

Quantifying Stock Price Response to Demand Fluctuations

We address the question of how stock prices respond to changes in demand. We quantify the relations between price change $G$ over a time interval $\Delta t$ and two different measures of demand fluctuations: (a) $\Phi$, defined as the difference between the number of buyer-initiated and seller-initiated trades, and (b) $\Omega$, defined as the difference in number of shares traded in buyer and seller initiated trades. We find that the conditional expectations $<G >_{\Omega}$ and $_{\Phi}$ of price change for a given $\Omega$ or $\Phi$ are both concave. We find that large price fluctuations occur when demand is very small --- a fact which is reminiscent of large fluctuations that occur at critical points in spin systems, where the divergent nature of the response function leads to large fluctuations.Comment: 4 pages (multicol fomat, revtex

NTAS 16 sixteenth setting of the NTAS Ocean Reference Station cruise on board RV Endeavor January 21 - February 8, 2017 Narragansett, Rhode Island - San Juan, Puerto Rico

The Northwest Tropical Atlantic Station (NTAS) was established to address the need for accurate air-sea flux estimates and upper ocean measurements in a region with strong sea surface temperature anomalies and the likelihood of significant local air–sea interaction on inter-annual to decadal timescales. The approach is to maintain a surface mooring outfitted for meteorological and oceanographic measurements at a site near 15N, 51W by successive mooring turnarounds. These observations are used to investigate air–sea interaction processes related to climate variability. The NTAS Ocean Reference Station (ORS NTAS) is supported by the National Oceanic and Atmospheric Administration’s (NOAA) Ocean Observing and Monitoring Division. This report documents recovery of the NTAS-15 mooring and deployment of the NTAS-16 mooring. Both moorings used Surlyn foam buoys as the surface element. These buoys were outfitted with two Air–Sea Interaction Meteorology (ASIMET) systems. Each system measures, records, and transmits via Argos satellite the surface meteorological variables necessary to compute air–sea fluxes of heat, moisture and momentum. The upper 160 m of the mooring line were outfitted with oceanographic sensors for the measurement of temperature, salinity and velocity. The mooring turnaround was done by the Upper Ocean Processes Group of the Woods Hole Oceanographic Institution (WHOI), onboard R/V Endeavor (cruise EN590). The cruise took place between January 21 and February 8 2017. The NTAS-16 mooring was deployed on January 30, and the NTAS-15 mooring was recovered on January 31. A 24-hour intercomparison period was conducted on January 29 in front of the NTAS 15 buoy, and again on February 1 in front of the NTAS 16 buoy. During the inter-comparisons, data from instrumentation on the buoys, telemetered through Argos satellite system, and the ship’s meteorological and oceanographic measurements were monitored while the ship was stationed 0.2 nm downwind of the buoys. This report describes these operations, as well as other work done on the cruise and some of the pre-cruise buoy preparations. Other operations during EN590 consisted in the recovery and deployment of the Meridional Overturning Variability Experiment (MOVE) Pressure Inverted Echo Sounders (PIES) at two MOVE arrays (MOVE 1 in the east, and MOVE 3 in the west near Guadeloupe). Acoustic downloads of data from (PIES) and subsurface mooring (MOVE1, 3 and 4) were also conducted. MOVE is designed to monitor the integrated deep meridional flow in the tropical North Atlantic.Funding was provided by the National Oceanic and Atmospheric Administration under Grant No. NA14OAR4320158