Discussion of. Competition in high-speed markets and market quality: Effects of the SEC naked access ban. (Chakrabarty et al.

Transcription

1 Discussion of Competition in high-speed markets and market quality: Effects of the SEC naked access ban (Chakrabarty et al, 2014) by Bart Zhou Yueshen INSEAD 10th Annual Central Bank Workshop, Rome October 3, 2014

2 Summary Research question: HFT competition and market quality SEC banned naked access in Nov 2011 reduced some HFT participation comparing market quality measures before and after a comprehensive list of measures nice robustness checks Result better liquidity provision (dominating) lower price efficiency

3 Summary Research question: HFT competition and market quality SEC banned naked access in Nov 2011 reduced some HFT participation comparing market quality measures before and after a comprehensive list of measures nice robustness checks Result better liquidity provision (dominating) lower price efficiency

4 Summary Research question: HFT competition and market quality SEC banned naked access in Nov 2011 reduced some HFT participation comparing market quality measures before and after a comprehensive list of measures nice robustness checks Result better liquidity provision (dominating) lower price efficiency

5 Discussion

6 Naked access ban ban market quality

7 Naked access ban ban (HFT competition?) market quality

8 Compétition, je t aime! Vague idea about competition example: higher levels of competition are associated with higher trading costs Questions! What kind of the competition is it? How is the ban affecting this competition? How to empirically examine the competition? Competition in the paper quoting activity quote-to-trade ratio proxying HFT overall but too general

9 Compétition, je t aime! Vague idea about competition example: higher levels of competition are associated with higher trading costs Questions! What kind of the competition is it? How is the ban affecting this competition? How to empirically examine the competition? Competition in the paper quoting activity quote-to-trade ratio proxying HFT overall but too general

10 Compétition, je t aime! Vague idea about competition example: higher levels of competition are associated with higher trading costs Questions! What kind of the competition is it? How is the ban affecting this competition? How to empirically examine the competition? Competition in the paper quoting activity quote-to-trade ratio proxying HFT overall but too general

11 Compétition, je t aime! Vague idea about competition example: higher levels of competition are associated with higher trading costs Questions! What kind of the competition is it? How is the ban affecting this competition? How to empirically examine the competition? Competition in the paper quoting activity quote-to-trade ratio proxying HFT overall but too general

12 Compétition, je t aime! My take on commpetition : Not all HFTs are created equal: Hagströmer and Nordén (2013); Menkveld and Zoican (2014) Breckenfelder (2013) Competition among HFT liquidity providers: good Competition among HFT liquidity takers: bad ( net effect is negative) Who are affected most by the ban? adverse selection and displayed liquidity price efficiency seem consistent with the removal of traders relying on a speed advantage to exploit their short-lived information

13 Compétition, je t aime! My take on commpetition : Not all HFTs are created equal: Hagströmer and Nordén (2013); Menkveld and Zoican (2014) Breckenfelder (2013) Competition among HFT liquidity providers: good Competition among HFT liquidity takers: bad ( net effect is negative) Who are affected most by the ban? adverse selection and displayed liquidity price efficiency seem consistent with the removal of traders relying on a speed advantage to exploit their short-lived information

14 Who are affected most by the ban ban predatory HFT competition market quality A more direct check using future data? counting high-frequency arbitrage opportunity between stock and future estimating correlation between stock and future (eg Budish, Cramton, and Shim, 2013; Huh, 2014; data availability?) Important policy implication and reference (cf Brogaard, Hendershott, and Riordan, 2014)

15 Who are affected most by the ban ban predatory HFT competition market quality A more direct check using future data? counting high-frequency arbitrage opportunity between stock and future estimating correlation between stock and future (eg Budish, Cramton, and Shim, 2013; Huh, 2014; data availability?) Important policy implication and reference (cf Brogaard, Hendershott, and Riordan, 2014)

16 Who are affected most by the ban ban predatory HFT competition market quality A more direct check using future data? counting high-frequency arbitrage opportunity between stock and future estimating correlation between stock and future (eg Budish, Cramton, and Shim, 2013; Huh, 2014; data availability?) Important policy implication and reference (cf Brogaard, Hendershott, and Riordan, 2014)

17 Digging more into the results Effect of reducing predators (Il)liquidity: (Figure 4 of Holden and Subrahmanyam, 1992) 25 2 lu 15 z Calendar Time 1 informed trader + 2 informed traders 4 informed traders 3 20 informed traders

18 Digging more into the results Sorting according to stock sizes Panel A: Quoting and trading activity QUOTES TRADES QTR QSP DEPTH Large -0323*** -0242*** -0251*** -0160*** -0078*** -0118*** -0176*** -0150*** 0294*** 0288*** Medium -0322*** -0243*** -0214*** -0108*** -0109*** -0153*** -0098*** -0080*** ** Small -0336*** -0266*** -0176*** -0081*** -0160*** -0199*** -0070*** -0056*** 0032*** 0037*** * No Yes No Yes No Yes No Yes No Yes Does this have implications on HFT compositions in large, medium, and small stocks?

19 Digging more into the results Sorting according to stock sizes Panel A: Quoting and trading activity QUOTES TRADES QTR QSP DEPTH Large -0323*** -0242*** -0251*** -0160*** -0078*** -0118*** -0176*** -0150*** 0294*** 0288*** Medium -0322*** -0243*** -0214*** -0108*** -0109*** -0153*** -0098*** -0080*** ** Small -0336*** -0266*** -0176*** -0081*** -0160*** -0199*** -0070*** -0056*** 0032*** 0037*** * No Yes No Yes No Yes No Yes No Yes Does this have implications on HFT compositions in large, medium, and small stocks?

20 Digging more into the results Order life pre post post-pre [1] [2] [3] [4] [5] *** 0265 *** 0295 ** *** *** ** *** ** *** *** ** *** *** ** *** *** ** *** *** ** *** ** ** *** 0129 *** 0089 ** What are the ultra short-lived orders? Pinging (Xu, 2014)? Overshooting (Yueshen, 2014)? = consistent with lower adverse selection post ban

21 Digging more into the results Order life pre post post-pre [1] [2] [3] [4] [5] *** 0265 *** 0295 ** *** *** ** *** ** *** *** ** *** *** ** *** *** ** *** *** ** *** ** ** *** 0129 *** 0089 ** What are the ultra short-lived orders? Pinging (Xu, 2014)? Overshooting (Yueshen, 2014)? = consistent with lower adverse selection post ban

22 Miscellaneous Who are not affected by the ban? Only small HFTs? The broker-dealers orders must also be integrity checked, no? = same magnitude of latency added? Effective spread, price impact, and realized spread 5 min, 1 min still too long? O Hara (2014): 5 seconds, 15 seconds? Volatility: High-minus-low add variance ratio? add realized variance? Adverse-selection: PIN measure? Diff-in-diff as the main result?

23 References Breckenfelder, H-Johannes 2013 Competition between High-frequency Traders, and Market Quality Working paper Brogaard, Jonathan, Terrence Hendershott, and Ryan Riordan 2014 High Frequency Trading and the 2008 Short Sale Ban Working paper Budish, Eric, Peter Cramton, and John Shim 2013 The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response Working paper Chakrabarty, Bidisha, Pankaj K Jain, Andriy Shkilko, and Konstantin Sokolov 2014 Quote Intensity and Market Quality: Effects of the SEC Naked Access Ban Working paper Hagströmer, Björn and Lars L Nordén 2013 The Diversity of High-Frequency Traders Journal of Financial Markets 16 (4) Holden, Craig W and Avanidhar Subrahmanyam 1992 Long-Lived Private Information and Imperfect Competition The Journal of Finance 48 (1): Huh, Yesol 2014 Machines vs Machines: High Frequency Trading and Hard Information Working paper Menkveld, Albert J and Marius A Zoican 2014 Need for Speed? Exchange Latency and Market Quality Working paper O Hara, Maureen 2014 High Frequency Market Microstructure Working paper Xu, Jiangmin 2014 Optimal Strategies of High Frequency Traders Working paper Yueshen, Bart Zhou 2014 Queuing Uncertainty Working paper