Beruflich Dokumente
Kultur Dokumente
MSc. in Finance
SESSION 1
AN OVERVIEW OF THE TRADING INDUSTRY
Class Handouts
Laurence Lescourret
L Lescourret 1
An Overview of the Trading Industry
2. Stylized facts
3. Policy issues
L Lescourret 2
1.) The Trading Industry
L Lescourret 3
1.) The Trading Industry
Markets
L Lescourret 4
1.) The Trading Industry
L Lescourret 5
1.) The Trading Industry
Some Figures
Largest exchanges by value of share trading in the
Electronic order book in 2015 (Jan-Sept)
%change/ %change/
2015
Exchange Jan/Sep14 Jan/Sep14
January Yeartodate (inUSD) (inlocalcur)
NorthAmerica
BATSGl oba l Ma rkets US 1240661,5 10653413,6 13,4% 13,4%
Na s da qUS 1183196,4 9498061,0 8,7% 8,7%
NYSE 1520414,3 13165372,5 16,5% 16,5%
TMXGroup 120296,7 923260,1 8,4% 6,0%
AsiaPacific
HongKongExcha nges a ndCl ea ri ng 155247,2 1773653,5 62,2% 62,2%
Ja pa nExcha ngeGroup 401511,0 4255426,6 6,1% 24,6%
Sha ngha i StockExchange 1277890,6 17764180,7 508,3% 509,4%
ShenzhenStockExcha nge 800389,1 14511601,3 294,7% 295,8%
EuropeAfricaMiddleEast
BATSChi xEurope 290697,1 2426786,5 27,6% 55,2%
BMESpa ni s hExchanges 94016,4 772142,2 1,3% 20,3%
Deuts cheBoers e 142125,0 1213786,2 10,8% 34,9%
Euronext 183869,6 1614640,5 11,9% 36,2%
L Lescourret 6
1.) The Trading Industry
Some Figures
1971: Nasdaq
L Lescourret 9
1.) The Trading Industry
Other Markets
Europe:
Regulated markets: exchanges
London Stock Exchange (LSE)
EuroNext (Paris/Amsterdam/Brussels/Lisbon),
now part of the NYSE group
Deutsche Brse (DB)
Milan Stock Exchange
Swiss Stock Exchange (ou Virt-X)
Stockholm/Copenhagen/Helsinki/Oslo (OMX)
L Lescourret 10
1.) The Trading Industry
Primary Markets
L Lescourret 11
1.) The Trading Industry
Listing Requirements
Set of conditions imposed by a given stock exchange
upon companies that want to be listed on that
exchange
Conditions on the minimum number of shares
outstanding, on the free float, on a minimum
market capitalization
Procedures
Need of a listing sponsor sometimes
L Lescourret 12
1.) The Trading Industry
Delisting
Decision to delist
Public-to-Private transaction ( going private )
Example: LBO
Obligation to delist
Change of legal status
L Lescourret 13
1.) The Trading Industry
Secondary Markets
L Lescourret 14
1.) The Trading Industry
Regulated Markets
A supervised market by a regulatory authority
that regulates the issuance of securities,
transactions, quotations, etc.
Example: NYSE, Nasdaq, BATS, Euronext
Characteristics:
Member Status
Clearing House.
Example: LCH Clearnet for NYSE-Euronext
L Lescourret 15
1.) The Trading Industry
Financial markets and price formation:
an ideal organization
The Walrasian classical model
Construction of
the aggregate supply
and aggregate demand curves
L Lescourret 16
1.) The Trading Industry
The ideal organization :
the Walrasian mechanism ?
H1. Free and perfect information (available to all
participants)
H2. No transaction costs
H3. Agent are price-takers
H4. Prices and quantities can be infinitely divisible
H5. Atomicity of agents who act independently.
L Lescourret 17
1.) The Trading Industry
Real-word market organizations:
(1) Demsetz (1968)
L Lescourret 19
1.) The Trading Industry
Source: Euronext
L Lescourret 21
Source: DERIVA B.V.
1.) The Trading Industry
Consequences: Trading frictions and
transaction costs
L Lescourret 22
1.) The Trading Industry
Consequences
L Lescourret 23
1.) The Trading Industry
Main players
L Lescourret 26
1.) The Trading Industry
L Lescourret 27
1.) The Trading Industry
L Lescourret 28
1.) The Trading Industry
L Lescourret 29
1.) The Trading Industry
Trading protocols
1. Order-driven markets
No intermediary / Direct match between buy and
sell orders
Rules based on order precedence rules that rank
and match orders
1. Auctions
Exogenous date of transaction (CALL AUCTION)
Endogenous date of transaction(CONTINUOUS) /
2. Crossing networks : They use the price derived
from the securities primary markets. They do
not produce price discovery (cannot be used as a
stand-alone system)
1. Quote-driven markets
An intermediary supply liquidity. Dealers
participate in every trade, and may trade with
each other (interdealer-trading)
L Lescourret 30
1.) The Trading Industry
Continuous markets
L Lescourret 32
1.) The Trading Industry
L Lescourret 33
1.) The Trading Industry
Quote-driven Markets
Characteristics
Counterparty : intermediaries
Role of intermediaries :
Dealers supply all liquidity or immediacy
Dealers trade on their own account. They supply
liquidity using their own inventory account. They
make a market by providing continuously ask and
bid prices
What are the risks ? How to be compensated ?
Order-driven markets
Characteristics
Counterparty: another order. Buy and sell
orders are matched directly, anonymously
Production of liquidity is guaranteed by limit
orders
Examples
Call or batch markets: the opening of Euronext,
NYSE, Tokyo SE, etc...
L Lescourret 35
1.) The Trading Industry
L Lescourret 36
1.) The Trading Industry
Stock markets nowadays
Source: Terry Hendershott
L Lescourret 37
1.) The Trading Industry
Consolidated markets
Formerly, this meant that all trading occurred on one
central computing system
Only one (double) price exists (buy side/sell side) at any
given moment for a given asset
examples
Euronext, TSE (Toronto Stock Exchange),
Stockholm stock exchange
Drawbacks: Monopoly fees
Advantages: Network effect: better liquidity, ease to
find a counterparty
Fragmented Markets
Several prices co-exist
Sources of the fragmentation
Organisation of Markets : NASDAQ, FX
Market practices : internalisation, preferencing,
new rules: MiFID (introduction of Chi-X),
Regulation (regNMS, MiFID)
Drawbacks : Weight of the intermediaries, opacity,
fragmentation of orders and price discovery
Advantages: Competition, innovation -> decrease of fees
L Lescourret 38
1.) The Trading Industry
Hybrid Organisations
L Lescourret 39
1.) The Trading Industry
...
L Lescourret 40
1.) The Trading Industry
L Lescourret 41
1.) The Trading Industry
L Lescourret 42
1.) The Trading Industry
Cash Markets
Stocks
Rougly 5,000 actively traded stocks in the US. The largest
1,500 acount for about 90% of the total market
capitalization.
Currencies
Derivatives Markets
Options
Forwards, Futures,
Swaps, etc.
L Lescourret 43
1.) Generalities
L Lescourret 44
1.) The Trading Industry
The Regulators
L Lescourret 45
1.) The Trading Industry
The Regulators
Central Banks
3. Policy issues
L Lescourret 47
2.) Main stylized facts
Some stylized facts and empirical
findings
Existence of a bid/ask spread
L Lescourret 49
2.) Main stylized facts
Trading volume on the Paris Bourse
(Mai and Tchemeni, 1995)
L Lescourret 52
2.) Main stylized facts
Trading volume and volatility on the Nasdaq
(Barclay and Hendershott, 2004)
L Lescourret 53
2.) Main stylized facts
L Lescourret 54
2.) Main stylized facts
L Lescourret 55
2.) Main stylized facts
L Lescourret 56
2.) Main stylized facts
0,035 0,12
0,03 Volatility
0,1
Transaction costs (average)
0,025
0,08
0,02
0,06
0,015
0,04
0,01
0,02
0,005
0 0
1 2 3 4 5 6
L Lescourret 57
3.) Policy issues
Where are we
3. Policy issues
L Lescourret 58
3.) Policy issues
Liquidity
Elusive concept : a multi-faceted phenomenon,
referring simultaneously to the availability, cost and
promptness of trading.
Key condition of well-functioning markets (OHara,
1995)
3 dimensions: width (b/a spread) ; depth (number of
shares available at given quote) ; resiliency (speed of
price adjustments after a liquidity shock)
Taxes
L Lescourret 59
3.) Policy issues
L Lescourret 60
3.) Policy issues
Market Stability
A measure : Price Volatility
Risk-Sharing
Optimal allocation of quantities (of
secutrities) among agents having
different risk aversion.
L Lescourret 61
3.) Policy issues
L Lescourret 62
3.) Policy issues
Current issues in market organizations
and regulation
FINM 32417/32408
TRADING and MARKET ORGANISATION
Laurence Lescourret
Call Auction Markets
1. Introduction
6. Limitations
L Lescourret 2
1.) Introduction
Trading platform overview
M. OHara, 2002
Equity trading system
Trading mechanism
- Single 64%
- M ultiple 33%
- N/ A 2%
Floor system 5%
Trading process
- Continuous 36%
- Call 2%
- Combination 62%
- Yes 31%
- No 69%
L Lescourret 3
1.) Introduction
At what price?
At 1 single equilibrium price
Buy orders at this price and higher, and sells at this
price and lower, generally execute
L Lescourret 4
1.) Introduction
Design features
Auctions
Example A: Regulated markets
Use for illiquid securities (mid-, small-caps stocks):
Eurolist at 10h30 and at 16h00, NYSE
Alternext Europe at 15h00);
Arizona Stock Exchange (5 call auctions per day),
Closed in October 2001;
Tawan Stock Exchange, formerly used high-
frequency auctions, now continuous;
Used at the opening, closing, and during trading
halts of some exchanges :
Euronext , Toronto, Tokyo, Nasdaq (Opening
and closing cross implemented in 2005), Xetra
(2 calls/day ; 1 at noon)
Design features
Design features
The matching algorithm
The level of transparency: dissemination of an
indicative auction price
L Lescourret 6
2.) Examples
L Lescourret 7
2.) Examples
Mechanism:
Physical meeting (at Rothschild and Sons) until 2004,
Since the first meeting occurred (Sept. 12, 1919) in
the , at the start of each call auction, the Chairman
announces an opening price to the other 4 members
who relay this price to their customers ; the auction
will last as long as it is necessary to set a price that
clears the market.
April 14, 2004 : Rothschild and Sons resigned as Chair
of the London Gold Fix withdraw from the market and
was replaced by Barclays. The call auction is now
conducted via conference-call.
January 2014-April: Deutsche Bank tried to sell and
quit the fix in April.
L Lescourret 8
2.) Examples
Now,
BMA Gold Price was launched on the 20th March
2015 to replace the historic London Gold Fix.
L Lescourret 9
2.) ExAmples
L Lescourret 10
2.) Examples
Illiquid securities
L Lescourret 11
3.) Description
Description of a call
(*) If more than one price satisfies the volume maximization, other
price-setting rules come into play: minimizing the difference with
the reference price (for instance, the closing price of the day before)
L Lescourret 12
Example 1 : A snapshot of the limit order book @ 17.30
(Accumulation of orders between 17.25 and 17.30)
Heure Ord. Qt Achat Vente Qt Ord. Heure
17:25 1 1 500 ATP 63,25 4 000 8 17:39
17:26 2 2 800 63,7 63,2 8 000 2 17:40
17:26 2 1 000 63,35 63,7 3 000 2 17:40
17:27 1 300 63,25 63,35 7 500 2 17:40
17:28 3 1 100 63,2 63,2 50 1 17:40
17:28 2 3 000 63,15 63,15 150
63,70
63,35
Prix 63,25
63,20
63,15
63,70
63,35
Prix 63,25
63,20
63,15
L Lescourret 14
3.) Description
TraderEx
Sparse book
Thick book
3.) Description
TraderEx: the price-setting
mechanism
When you trade at the open, you must know the rules
of auction price settin in order to determine how best
to price and size your orders in a call auction
Remarks
L Lescourret 17
4.) Attributes
At the open
Stylized facts: U-shaped trading volume
Paris Bourse: almost 10% of the total daily
volume is traded at the opening
NYSE: around 10%
Tokyo: between1/3 and of the total volume
L Lescourret 18
4.) Attributes
At the close
Stylized facts: U-shaped trading volume
Italian SE : 10% of the daily exchanged volume
Why? The closing price is broadly used as a
reference price (RP)
For fund managers: to calculate the NAV on
which redemptions and purchases are based
For index calculation: Entry/exit of stocks.
Index arbitrageurs will try to unwind their
positions by buying or selling short at closing
prices.
Portfolio performance evaluation: M-T-M of
portfolios, positions, etc.
Derivatives benchmarks: index futures
contracts and other cash-settled derivatives
are usually settled at closing prices.
Consequences: A closing call auction is also
implemented by the Nasdaq in 2004.
L Lescourret 19
4.) Attributes
Performance
L Lescourret 20
4.) Attributes
Advocates of a call
L Lescourret 21
5.) Call and Price manipulations
L Lescourret 22
5.) Call and Price manipulations
Burstoftradingatthe
highestpointinthelast5
min
L Lescourret 24
5.) Call and Price manipulations
LIBOR rigging
Libor is an average interest rate calculated through
submissions of interest rates by major banks in London.
BBA involved
June 2012: Barclays fined $200m by the CFTC, $160m
by the United States Department of Justiceand 59.5m
by the Financial Services Authority for attempted
manipulation of the Libor and Euribor rates.
2014: NYSE Euronext took over running the Libor from
the BBA
L Lescourret 25
5.) Call and Price manipulations
L Lescourret 26
6.)Limitations
Performance:
Ambiguous result on the volatility : positive effect in
Paris, Nasdaq, but mixed in LSE and in the Australian
SE
Reasons
Algorithms + or efficient (see Comerton-Forde)
Traders modify their order submission strategies
(changes in the level of impatience : a call is shown to
reduce the aggressiveness of orders submission strategies,
which reduces the price volatility)
FINM 32417/32408
TRADING and MARKET ORGANIZATIONS
Laurence Lescourret
L Lescourret 1
Quote-driven markets
1. Introduction
2. Description
3. Role of financial intermediaries
4. Attributes
5. Example
L Lescourret 2
Reminders Dealers Market
Continuous trading
L Lescourret 3
1.) Introduction Dealers Market
Introduction
Source: R. Schwartz
L Lescourret 4
2.) Description Dealers Market
Main features
L Lescourret 5
2.) Description Dealers Market
Main features
Interdealer markets
A dealer making a market will build up a
suboptimal position over time (too long or too
short positions)
Dealers lay off or build position in the inter-dealer
market
Interdealer features
Not visible to non-dealers
3 mechanisms: non-anonymous bilateral
negotiation (dealer to dealer) ; anonymous trade
intermediated by a voice broker or interdealer
LOB
L Lescourret 6
3.) Intermediaries Dealers Market
Roles
Liquidity / immediacy : A dealer supplies
liquidity on his own inventory
Immediacy for a small size order (200 shares) is not a
problem.
What about the immediacy of a large order (300,000
shares, or more) ?
Price Discovery
Other Services
Liquidity providers around corporate events (IPOs,
SEOs, Repurchase of cequity, etc.)
Research, clearing and settlement services, etc...
L Lescourret 7
3.) Intermediaries Dealers Market
Dealers compensation
L Lescourret 8
3.) Intermediaries Dealers Market
Brokers :
Trade on behalf of or for the account of (agency
trading)
no obligation to quote a price or to supply liquidity
obligation of best execution
Examples: Newedge, GFI, Lime Brokerage
L Lescourret 9
3.) Intermediaries Dealers Market
Inside spread =
25 25.25
L Lescourret 10
4.) Attributes Dealers Market
L Lescourret 11
4.) Attributes Dealers Market
Attributes
Advantages
No trading halts
Liquidity supplied even in the case of market
stress
Downward market,
Expiry of derivatives contracts,
Market opening and closing,
Block trading
Drawbacks
Fragmentation of the order flow (search costs of
the best price).
Transactions are usually the result of bilateral
negotiations over the phone
L Lescourret 14
5.) Example 2: Credit market Dealers Market
L Lescourret 15
5.) Example 3: Credit market Dealers Market
3 segments:
corporate single-name, sovereign single-name, and
index
Trades cluster
around a few typical sizes ($5 million for corporate
single-name for instance) and around 5-year maturity
L Lescourret 18
ESSEC MSTF / FEA / MSc. in Finance
FINM 32417/32408
TRADING and MARKET ORGANIZATIONS
Laurence Lescourret
1
Order-Driven Markets
1. Introduction
2. Mechanism
3. Stylized facts
5. Advantages
6. Limitations
L Lescourret 2
1.) Introduction
Order-driven markets
1. Periodic Markets :
Example: Call/batch market (Fixing) :
Collection of orders and multilateral
transactions at a single price.
L Lescourret 3
2.) Mechanism
Examples :
Euronext 100 (NSC), Deutsche Brse (Xetra),
London Stock Exchange (SETS), Inet (Nasdaq),
Tokyo SE, etc...
L Lescourret 4
2.) Mechanism
Example
L Lescourret 5
2.) Mechanism
Orders
L Lescourret 6
2.) Mechanism
Advantages
control of the execution price
Risks :
Execution uncertainty : might not be executed or
only partially;
Risk of being picked off (the Winners Curse
problem: the winner will tend to overpay) : poor
execution when prices move towards and through
the price limit, front-running and information
leakage.
L Lescourret 7
2.) Mechanism
Market(able) Order
Advantage :
Immediately and completely filled
Risks :
Execution price uncertainty (price impact)
L Lescourret 8
2.) Mechanism
Stop Order
Price-contengent orders: they activate when their price
contingency is met
Almost always market orders
L Lescourret 9
2.) Mechanism
L Lescourret 10
2.) Mechanism
Submission of a market
order for 500 shares
Achat Vente Dernires Transactions
Ord. Qt Achat Vente Qt Ord. Qt cours
1 150 63,50 40 63,55
2 280 63,40 150 63,60
2 100 63,35 300 63,65
1 300 63,25 63,70 740 2 10 63,70
3 1 100 63,20 63,80 50 1 50 63,55
2 3 000 63,15 63,85 150 1 270 63,50
L Lescourret 11
2.) Mechanism
Orders placed
Beyond the best bid or offer are away from the market
At the best bid or ask are at the market
Between the best bid and the best ask are in the
market
Examples:
Market(able) Order : Totally executed: the sell order
(resp. buy) walk the book
Marketable order at the best limit: complete fill if the
quantity available at the best limit is larger or equal.
Aggressive limit order :
Example: A buy order specifying a price higher than
that the best ask price in the book.
L Lescourret 12
2.) Mechanism
Advantages:
Win the spread + other compensations :
execution fees are less, even a payment is
repayed by the platform for every limit order
executed. (see graph 19)
L Lescourret 13
Order-Driven Markets
1. Introduction
2. Mechanism
3. Stylized facts
5. Advantages
6. Limitations
L Lescourret 14
3.) Stylized facts
L Lescourret 15
3.) Stylized facts
L Lescourret 16
3.) Stylized facts
L Lescourret 17
3.) Stylized facts
Price Formation (contd.)
Source: Biais et al. (1995)
L Lescourret 18
Order-Driven Markets
1. Introduction
2. Mechanism
3. Stylized facts
5. Advantages
6. Limitations
L Lescourret 19
4.) Order books and A.T.
Electronic trading, algorithmic trading
and high-frequency trading
Special care shoud be taken to distinguish:
1. Electronic trading refers to the ability to transmit
the orders electronically as opposed to telephone,
mail or in person
L Lescourret 20
4.) Order books and A.T.
Algorithmic trading
L Lescourret 21
4.) Order books and A.T.
Algorithmic algorithm
By asset classes
L Lescourret 22
4.) Order books and A.T.
AT trend
23
4.) Order books and A.T.
24
4.) Order books and A.T.
L Lescourret 25
4.) Order books and A.T.
L Lescourret 26
4.) Order books and A.T.
L Lescourret 29
4.) Order books and A.T.
HFT trend
30
4.) Order books and A.T.
Electronic market-making
make / take spreads: rebates form a major
component of the revenue of electronic market-
makers
The rise of the machine: in 1997, Island: paid
liquidity providers 0.1 cents per share , while
charging those that took liquidity 0.25 cents par
share
L Lescourret 31
4.) Order books and A.T.
Impact of HFT?
Nb of cancelled orders?
NASDAQ: trading frequency increased from
microseconds to nanoseconds the order
cancellation/execution ratio increased
dramatically from 26:1 to 32:1. ->no impact on
liquidity, price efficiency and trading volume,
but found evidence consistent with quote
stuffing
95% of orders cancelled?
Fleeting Orders
On August 30, 2011, about three-million orders were submitted to
the NASDAQ exchange to trade the stock SPDR S&P 500 Trust
(ticker symbol SPY). This image shows that 18.3 percent of the
orders were cancelled within one millisecond, and 42.5 percent of
orders had a lifespan of less than 50 milliseconds, less time than it
takes to transfer a signal between New York and California. More
than 40 percent of orders, in other words, disappeared before a
trader in California could react.
Source : Mao Ye
33
4.) Order books and A.T.
Impact of HFT?
34
4.) Order books and A.T.
L Lescourret 35
4.) Order books and A.T.
L Lescourret 36
4.) Order books and A.T.
Manipulations
quote stuffing ?
it involves submitting an abnormally large number of
orders followed immediately by a cancellation (within
0.001 seconds or less) with the aim to generate order
congestion.
Layering:
remplir le ct dun carnet par couches (layers) pour
attirer les investisseurs sur ce mme ct et les surprendre
en excutant du ct oppos lorsque cest possible tout en
annulant les ordres qui ont aid remplir le carnet
Front-running?
HFT buy early access to public data, jumping in between
buyers and sellers who would have found each other
anyways in a few milliseconds
More adverse selection: HFT crowd out other traders (slow-
traders and also HFTs)
38
4.) Order books and A.T.
40
4.) Order books and A.T.
Perspectives and Regulatory
aspects
New rules governing HFT servers?
Conclusions drawn by regulators following
the flash crash?
EU: the commission is reviewing the MiFID
framework directive: it intends to subject HFT
to MiFID requirements (risk management
obligations, capital requirements, market-
maker obligation such as order persistence and
tick sizes) and to supervision by a competent
authority
US: Dodd Frank Wall Street Reform and
Consumer Protection Act
41
4.) Order books and A.T.
Technology investment and
social cost: a waste of money?
42
4.) Order books and A.T.
Proposed policy?
43
Order-Driven Markets
1. Introduction
2. Mechanism
3. Stylized facts
5. Advantages
6. Limitations
L Lescourret 44
5. ) Advantages
Performance
Transparency ?
Price Discovery ?
L Lescourret 45
6.) Limitations
Limitations
Block trades
L Lescourret 46
6.) Limitations
Inactively traded stocks: The book is
empty?
Carrefour (02/21/2006,
at 13h30)
on Euronext, and on Virt-X
L Lescourret 47
6.) Limitations
Role of DMM
A designated market-maker
also called, liquidity provider on Euronext
formerly specialist on the NYSE
L Lescourret 48
ESSEC MS
FINM 32408
Trading et Organisation de march
Laurence Lescourret
1
L Lescourret
Session 5 Plan
1. Definition
2. Measures of Liquidity
3. Make-take spreads
4. Implementation shortfall
L Lescourret 2
1.) Definition
Liquidity - Definition
4 dimensions
Width: bid-ask spread for a given number of shares and
commissions and fees to be paid per share.
Depth: number of shares that can be traded at given bid
and ask prices.
Immediacy: how quickly trades of a given size can be done
at a given cost.
Resiliency: how fast prices revert to former levels after
they changed in response to large order flow imbalances
initiated by uninformed traders.
L Lescourret 3
1.) Definition
Recent Trends
L Lescourret 4
1.) Definition
Transaction costs
L Lescourret 5
2.) Measures of Liquidity
Remarks
Let us denote:
At= ask price at t
Bt = bid price at t
Pt = Transaction Price at t
Mt = midpoint at t
min Ai ,t max Bi ,t
Midpoint t M t i i
2
L Lescourret 6
2.) Measures of Liquidity
In order-driven markets:
Difference between the best buy limit order and the
best sell limit order in the book
In quote-driven markets:
Difference between the best ask (min Ai) quoted by (at
least) 1 dealer, and the best bid price (max Bi) quoted
by another dealer.
Drawbacks:
It may vary over the day (U-shaped)
Valid for small volumes only
L Lescourret 7
2.) Measures of Liquidity
Example
Quoted
Spread
Source: I. Werner
L Lescourret 8
2.) Measures of Liquidity
Examples:
Euronext
For the most liquid stocks (ABN Amro, ING Groep Dm,
Fortis, Dexia, or Alcatel): quoted spread=1,2 cents () in
2007.
L Lescourret 9
2.) Measures of Liquidity
Depth
Volume(a t ) Volume(b t )
Depth t
2
(a )Volume(a t ) (b t ) Volume(b t )
Depth t at /$ t
2
where
L Lescourret 10
2.) Measures of Liquidity
Effective Costs :
Effective Costs Qt Dt (Pt - Mt)
with Dt 1 in case of a buy order and Dt -1 in case of a sell
Effective Spread :
L Lescourret 11
2.) Measures of Liquidity
Example
Execution Price
Source: I. Werner 12
L Lescourret
2.) Measures of Liquidity
Ex post Measures ex post: Realized
Spread
Realized costs
Realized spread
RS t 2 Dt ( Pt M t )
with t=5, 10, 30, 60 min, and Dt=+1 in case of a buy order and
-1 in case of a sale order.
L Lescourret 13
2.) Measures of Liquidity
L Lescourret 14
2.) Measures of Liquidity
Resiliency
L Lescourret 15
2.) Measures of Liquidity
Examples
L Lescourret 16
2.) Measures of Liquidity
L Lescourret 17
2.) Measures of Liquidity
L Lescourret 19
2.) Measures of Liquidity
Reaction of institutional investors to
changing landscape
L Lescourret 20
2.) Measures of Liquidity
L Lescourret 21
2.) Measures of Liquidity
http://haimbodek.com/electronic_markets.html
L Lescourret 22
2.) Measures of Liquidity
L Lescourret 23
2.) Measures of Liquidity
Stake?: Regulation
L Lescourret 24
2.) Measures of Liquidity
Importance of the measure of the costs
of transaction
L Lescourret 25
2.) Measures of Liquidity
Implementation shortfall
Prix benchmark
L Lescourret 26