Microstructure

Session Chair: Carole Comerton-Forde, University of Melbourne

Does High Frequency Market Manipulation Harm Market Quality?

Jonathan Brogaard; University of Utah’s David Eccles School of Business
Dan Li; Chinese University of Hong Kong, Shenzhen
Jeffrey Yang; University of Utah

Securities markets continuously innovate to keep pace with technology. It is often debated if such innovation is beneficial and which market participants capture the benefits. We contribute to this debate by examining liquidity effects of a wide range of proprietary products and services introduced by exchanges in the United States between 2003 and 2017. Exchange innovation is generally associated with liquidity improvements for those investors, who trade in small quantities. The effect is opposite for institutional investors; their trading costs increase, and their market participation declines.

Discussant:  Gideon Saar, The University of Melbourne


Arms Sales in Financial Markets

Vincent Glode; University of Pennsylvania
Xingtan Zhang; University of Colorado Boulder

Many financial transactions are of a fixed-sum nature, meaning that improvements in the terms of trade for one party come at the expense of another party.  We model how the sales of trading advantages (e.g., data or co-location services) affect traders' endogenous participation in financial markets and vice-versa.  Sellers of trading advantages (e.g., data providers or securities exchanges) maximize profits by charging prices that may lead to inefficiently low levels of market participation and liquidity in equilibrium. Optimal sales of trading advantages lead less sophisticated investors to conclude that financial markets are too ``rigged'' and to exit these markets.

Discussant: Zhuo Zhong, The University of Melbourne

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