Hot Topics in Market Microstructure…

Rotman Distinguished Lecture SeriesMarch 2008

Ingrid M. WernerMartin and Andrew Murrer Professor of Finance

Fisher College of Business, The Ohio State University

Hot Topics in Market Microstructure!

• Liquidity Risk and Asset Pricing– Lee (2006) international evidence, comparing measures…

– Chen (2005) comparing measures…

– Wu, He, Li, and Wang (2006) US Gov Bond market…

– New markets

– Better measures

• Liquidity Risk and Optimal Trading Strategies– Bertsimas and Lo (2002) optimal control of execution costs

– Almgren (2004) optimal executions with non-linear impact functions and trading induced risk

– Not much work done

– People working in this area tend to end up in industry…

Hot Topics in Market Microstructure!

• Distressed markets– Brunnermeier and Pedersen (2005) predatory trading– Carlin, Lobo, and Viswanathan (2007) cooperative and predatory trading– Important these days!

• Limits to arbitrage– Mitchell, Pulvino, and Stafford (2002) value < sum of parts…– Chen, Stanzl, and Watanabe (2005) trading costs wipes out anomalies– Room for more work here!

• Retail trading– Barber and Odean…– Seru, Shumway, and Stoffman (2007) learning by trading– Still lots to learn!

Hot Topics in Market Microstructure!

• Institutional changes– New trading platforms (Hybrid)– New features of existing platforms (Open/Close)– New markets/competitors (BATS)– Dynamic area– Effects on trading costs– Effects on market efficiency

• Regulatory changes– Reg SHO– Reg NMS– MIFIT– I am sure there will be more to come– Need to be fast though…

Hot Topics in Market Microstructure!

• Dark pools– We know very little– Data is hard to come by…– Proprietary datasets– Effect on displayed liquidity– Effect on market efficiency– Effect on trading costs

• Algorithmic trading– We know very little– Data is hard to come by…– Proprietary datasets– Effect on displayed liquidity– Effect on market efficiency– Effect on trading costs

AFA Meetings 2008

• Market MakingHendrik Bessembinder, University of Utah

Michael J. Fleming , Federal Reserve Banks and Joshua V. Rosenberg , Federal Reserve Banks - How do Treasury Dealers Manage their Positions?Abstract and Article  

Albert J. Menkveld , Free University of Amsterdam - Designated Market Makers for Small-Cap StocksAbstract and Article  

Dan Li , Board of Governors of the Federal Reserve System - Rounding as Discrimination - Price Clustering in the OTC Tax-Exempt Bond MarketAbstract and Article  

Terrence Hendershott , University of California, Berkeley, Pamela C. Moulton , Fordham University and Mark S. Seasholes , University of California, Berkeley - Market Maker Inventories and LiquidityAbstract and Article  

Discussants: Pradeep Yadav , University of Oklahoma Kumar Venkataraman , Southern Methodist University Amy Edwards , Securities and Exchange Commission (SEC) Marios Panayides , University of Utah

AFA Meetings 2008

• Volume and LiquidityJennifer Huang, University of Texas at Austin

Daniel Dorn , Drexel University and Gur Huberman , Columbia University - Turnover and VolatilityAbstract and Article  

Timothy C. Johnson , London Business School - Volume, Liquidity, and Liquidity RiskAbstract and Article  

Marzena J. Rostek , University of Wisconsin - Madison and Marek Weretka , University of Wisconsin - Madison - Frequent Trading and Price Impact in Thin MarketsAbstract and Article  

Discussants: Bing Han , University of Texas at Austin Arvind Krishnamurthy , Northwestern University Dimitri Vayanos , London School of Economics & Political Science (LSE)

AFA Meetings 2008

• Information and TradeChristine Parlour, University of California, Berkeley

Paolo Colla , University of Bocconi and Antonio Mele , London School of Economics & Political Science (LSE) - Information Linkages and Correlated TradingAbstract and Article  

Nevzat Eren , University of Minnesota - Twin Cities and Han N. Ozsoylev , University of Oxford - Hype and Dump ManipulationAbstract and Article  

Alex Boulatov , University of Houston and Thomas J. George , University of Houston - Securities Trading when Liquidity Providers are InformedAbstract and Article  

Discussants: Johan Walden , University of California, Berkeley Bilge Yilmaz , University of Pennsylvania Ioanid Rosu , University of Chicago

AFA Meetings 2008

• Insider Trading, Arbitrage and Trader IdentityTarun Chordia, Emory University

Utpal Bhattacharya , Indiana University Bloomington and Hazem Daouk , Cornell University - When No Law is Better Than a Good LawAbstract and Article  

Ben R. Marshall , Massey University, Sirimon Treepongkaruna , Australian National University and Martin R. Young , Massey University - What Level of Compensation is Available to Arbitrageurs in the Foreign Exchange Market?Abstract and Article  

Juhani Linnainmaa , University of Chicago - Does it Matter Who Trades? Broker Identities and the Information Content of Stock TradesAbstract and Article  

Discussants: Arturo Bris , IMD International Jun Liu , University of California, San Diego Gideon Saar , Cornell University

NBER Working Papers MM

• 2008w13848 Bruce Lehmann Arbitrage-free: Limit Order Books and the Pricing of Order Flow Risk

• w13825 Yacine Ait-Sahalia, Jialin Yu: High Frequency Market Microstructure Noise Estimates and Liquidity Measures

•2007w13625 Zhi Da, Pengjie Gao, Ravi Jagannathan: Informed Trading, Liquidity Provision, and Stock Selection by Mutual Funds

• w13530 Alvin E. Roth: What Have We Learned From Market Design? • w13445 Richard G. Frank, Richard J. Zeckhauser: Custom Made Versus Ready to

Wear Treatments; Behavioral Propensities in Physician's Choices • w13225 Alvin E. Roth: Deferred Acceptance Algorithms: History, Theory, Practice,

and Open Questions • w12939 Markus K. Brunnermeier, Lasse Heje Pedersen: Market Liquidity and

Funding Liquidity • w12933 Eugene N. White: The Crash of 1882, Counterparty Risk, and the Bailout of

the Paris Bourse • w12887 Nicolae B. Garleanu, Lasse H. Pedersen: Liquidity and Risk Management • w12877 Mark Mitchell, Lasse Heje Pedersen, Todd Pulvino: Slow Moving Capital