Essays In Empirical Market Microstructure

Author : Ms. Yesol Huh
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (847 download)

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Download or read book Essays on Empirical Market Microstructure written by Ms. Yesol Huh and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis studies how automation and structural changes in equity markets have affected various aspects of liquidity. In the first part of the thesis, I study high frequency trading (HFT). I first develop a methodology for measuring HFT activities that uses a statistical model to estimate reaction speed from limit order data. This allows us to separate out and measure HFT activities from that of slower traders. Using these measures, I study HFTs' liquidity provision. In today's markets where high frequency traders (HFTs) act as both liquidity providers and takers, I argue that information asymmetry associated with HFTs' use of public, machine-readable information is important. This particular type of information asymmetry arises because some machines may sometimes access certain information before other machines due to randomness in relative speed. I show that liquidity-providing HFTs supply less liquidity to stocks that suffer more acutely from this information asymmetry problem. My results also show that stocks with low spreads, high beta, and low volatility have a greater information asymmetry of this type. Moreover, when markets become volatile, this information asymmetry problem becomes more severe, and liquidity provision by HFTs decreases. I discuss implications for market-making activity in times of market stress and for HFT regulations. Second part of this thesis studies algorithmic trading, which is a larger set that includes HFTs. Using the introduction of hybrid market in the New York Stock Exchange as a natural experiment, I show that algorithmic trading causes liquidity across stocks to co-move more; hybridization increases the 5-minute liquidity comovement by 30 to 50%. Moreover, the effect is stronger at daily frequencies: hybridization induces a 90% higher daily liquidity comovement. These results are due to both an increase in market liquidity risk and a decrease in idiosyncratic liquidity volatility.