Samir Abrol, Benjamin Chesir, Nikhil Mehta, Ron Ziegler
{"title":"High Frequency Trading and US Stock Market Microstructure: A Study of Interactions between\u0000Complexities, Risks and Strategies Residing in U.S. Equity Market Microstructure","authors":"Samir Abrol, Benjamin Chesir, Nikhil Mehta, Ron Ziegler","doi":"10.1111/fmii.12068","DOIUrl":"https://doi.org/10.1111/fmii.12068","url":null,"abstract":"<p>We examine the conditions, complexities and risks of a fragmented market microstructure to contextualize the role of algorithmic and high frequency trading in the US equity markets. The establishment of a national market system and Regulation NMS was meant to promote competition, recognizing the evolution and changing dynamics introduced by technological innovation. This evolution and governing rule set has had many positive effects in terms of competition, fee compression, tighter spread potential and volumes. Our paper identifies certain unintended consequences and complexities of the national market system including fragmentation, sub second quoting and trading, complex order types, data asymmetry, technological innovation, unique strategies and the algorithms that power them. When acting in concert, these complexities give rise to opportunities as well as emerging risks.</p><p>This high-speed system can be unstable and susceptible to inherent conflicts of interest, market abuse and price shocks. These shocks can be amplified by positive feedback loops accelerating single stock declines and also posing systemic risks in time scales beyond real-time physical human comprehension and reaction times. Furthermore they can produce contagion, which we refer to as ‘Flash Splashes’ caused by rapid withdrawals and injections of liquidity in increasingly linked asset classes, indices, sectors and global liquidity pools. High frequency trading strategies can be both passive and aggressive and usually display risk averse and low inventory characteristics. These strategies leverage fragmentation as they create or capture informational asymmetries. They interact directly with sell side algorithms that can hide intentions, hunt liquidity and sweep the order book. These interactions create market dynamics that can benefit and challenge anyone exposed to US equity markets.</p><p>Every market participant has a risk profile unique to their strategy and objective and while regulations will be enriched or revised and certain unfair practices eliminated great attention should be paid to understanding modern high speed trading risks and both the positive and negative impacts on all stakeholders. We have examined the regulations, complexities and risks to bring clarity and understanding to the current trading ecosystem for its users.</p>","PeriodicalId":39670,"journal":{"name":"Financial Markets, Institutions and Instruments","volume":"25 2","pages":"107-165"},"PeriodicalIF":0.0,"publicationDate":"2016-04-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1111/fmii.12068","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"91856365","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Special Issue in Honor of Professors Edward I. Altman and Ingo Walter","authors":"","doi":"10.1111/fmii.12047","DOIUrl":"https://doi.org/10.1111/fmii.12047","url":null,"abstract":"","PeriodicalId":39670,"journal":{"name":"Financial Markets, Institutions and Instruments","volume":"25 1","pages":"3"},"PeriodicalIF":0.0,"publicationDate":"2016-01-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1111/fmii.12047","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"91849749","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Marcia Millon Cornett, Otgontsetseg Erhemjamts, Jim Musumeci
{"title":"Were U.S. Banks Exposed to the Greek Debt Crisis? Evidence from Greek CDS Spreads","authors":"Marcia Millon Cornett, Otgontsetseg Erhemjamts, Jim Musumeci","doi":"10.1111/fmii.12036","DOIUrl":"https://doi.org/10.1111/fmii.12036","url":null,"abstract":"<p>This study provides an empirical analysis of the impact of the Greek debt crisis on stock returns of U.S. commercial banks. We find that good (bad) news events pertaining to the Greek debt crisis, identified by large changes in the Greek CDS spread, produce insignificant positive (negative) abnormal stock returns. While banks were exposed to Greek debt, their exposure was such that it did not result in any abnormal fluctuations in bank values at the height of the crisis. When we measure the sensitivity of bank returns to changes in the Greek CDS spread in an effort to measure banks’ exposure to the crisis, we find that changes in the Greek CDS spread provide no additional explanatory power for bank returns beyond what a U.S. market index does. Finally, we find no bank characteristic that allows us to consistently predict the effect of the Greek crisis on specific banks.</p>","PeriodicalId":39670,"journal":{"name":"Financial Markets, Institutions and Instruments","volume":"25 1","pages":"75-104"},"PeriodicalIF":0.0,"publicationDate":"2016-01-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1111/fmii.12036","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"91849709","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"The Role of Sovereign Ratings in M&A Markets: Empirical Evidence from Latin America and South East Asia","authors":"Janna Mai Nguyen, Dodo zu Knyphausen-Aufseß","doi":"10.1111/fmii.12034","DOIUrl":"https://doi.org/10.1111/fmii.12034","url":null,"abstract":"<p>Sovereign ratings have not only been regarded as an indicator of country risk for foreign investors, but also as a determining factor for capital market conditions of domestic firms. Although they have attracted growing interest in academic research, the extant literature has so far rendered only minor attention to their role in corporate strategic investment decisions. This paper focuses on the influence of sovereign ratings on domestic and cross-border M&A decisions in a sample of Latin American and South East Asian countries. The empirical results lend support to the proposition that sovereign ratings condition the level of activity in domestic M&A markets as well as the attractiveness of domestic M&A targets for foreign acquirers. Moreover, the foreign bidders’ choice of ownership stakes in acquisitions appears to be affected. The paper thus highlights the relevance of sovereign ratings as a country-level factor to be considered in studies of corporate investment behavior.</p>","PeriodicalId":39670,"journal":{"name":"Financial Markets, Institutions and Instruments","volume":"25 1","pages":"5-48"},"PeriodicalIF":0.0,"publicationDate":"2016-01-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1111/fmii.12034","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"91849746","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"The Technology of Ratings Then and Now; Hiding in Plain Sight","authors":"Berry K. Wilson, John T. Donnellan","doi":"10.1111/fmii.12035","DOIUrl":"https://doi.org/10.1111/fmii.12035","url":null,"abstract":"The subprime crisis seriously undermined the credibility of the rating agencies and their approach to analyzing credit risk. Along with other identified problems with bond ratings, this study investigates the issue that the technology used by the ratings agencies is at best dated and little changed since John Moody published his first bond ratings in 1909. The study compares the predictive accuracy of Moody's bond ratings with the structural modeling approach of Vassalou and Xing (2004), using railroad data from the Great Depression. Study results show that the structural modeling approach outperforms the expert judgment incorporated in Moody's bond ratings from that period.","PeriodicalId":39670,"journal":{"name":"Financial Markets, Institutions and Instruments","volume":"25 1","pages":"49-74"},"PeriodicalIF":0.0,"publicationDate":"2016-01-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1111/fmii.12035","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"91849710","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Understanding the Components of Bank Failure Resolution Costs","authors":"Rosalind L. Bennett, Haluk Unal","doi":"10.1111/fmii.12031","DOIUrl":"https://doi.org/10.1111/fmii.12031","url":null,"abstract":"<p>In this paper, we demonstrate how the resolution costs associated with over 1,000 bank failures from 1986 to 2007 are distributed across the method of resolution, bank size, regulatory periods, and the existence of fraud. In addition, we document the time spent in the resolution by the resolution method and legislative period. Finally, we show how various classes of claimants against the failed banks bear the costs of the failure.</p>","PeriodicalId":39670,"journal":{"name":"Financial Markets, Institutions and Instruments","volume":"24 5","pages":"349-389"},"PeriodicalIF":0.0,"publicationDate":"2015-11-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1111/fmii.12031","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"91820260","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Estimating Portfolio Credit Losses in Downturns","authors":"Fernando F. Moreira","doi":"10.1111/fmii.12033","DOIUrl":"https://doi.org/10.1111/fmii.12033","url":null,"abstract":"This paper suggests formulas able to capture potential strong connection among credit losses in downturns without assuming any specific distribution for the variables involved. We first show that the current model adopted by regulators (Basel) is equivalent to a conditional distribution derived from the Gaussian Copula (which does not identify tail dependence). We then use conditional distributions derived from copulas that express tail dependence (stronger dependence across higher losses) to estimate the probability of credit losses in extreme scenarios (crises). Next, we use data on historical credit losses incurred in American banks to compare the suggested approach to the Basel formula with respect to their performance when predicting the extreme losses observed in 2009 and 2010. Our results indicate that, in general, the copula approach outperforms the Basel method in two of the three credit segments investigated. The proposed method is extendable to other differentiable copula families and this gives flexibility to future practical applications of the model.","PeriodicalId":39670,"journal":{"name":"Financial Markets, Institutions and Instruments","volume":"24 5","pages":"391-414"},"PeriodicalIF":0.0,"publicationDate":"2015-11-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1111/fmii.12033","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"91820263","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Carol Alexander, Julia Kapraun, Dimitris Korovilas
{"title":"Trading and Investing in Volatility Products","authors":"Carol Alexander, Julia Kapraun, Dimitris Korovilas","doi":"10.1111/fmii.12032","DOIUrl":"https://doi.org/10.1111/fmii.12032","url":null,"abstract":"<p>Since the banking crisis the market for volatility exchange-traded products has developed rapidly as it opens to clients beyond the large institutional investor pool. Speculation is driven by increasingly complex leveraged and inverse exposures including those that attempt to trade on significant roll costs in volatility futures curves. Longer-term investors use these products for the purposes of equity diversification, driven by fears of an ongoing Eurozone crisis. We survey the burgeoning academic literature in this area and present a comprehensive and up-to-date comparison of the market and statistical characteristics of European and US exchange-traded volatility products.</p>","PeriodicalId":39670,"journal":{"name":"Financial Markets, Institutions and Instruments","volume":"24 4","pages":"313-347"},"PeriodicalIF":0.0,"publicationDate":"2015-10-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1111/fmii.12032","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"109168031","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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