Fa(s)ta Morgana? : Estimating delusive liquidity by analysing the high frequency market microstructure of cross listed European stocks

Bonouvrie, P.A (2014) Fa(s)ta Morgana? : Estimating delusive liquidity by analysing the high frequency market microstructure of cross listed European stocks.

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Abstract:With the introduction of the Markets in Financial Instruments Directive (MiFID) in 2007 regulators aimed to ensure that investors were able to get the best possible execution of their orders by, amongst others, increasing competition in the market place. Due to this framework new trading facilities arose, leading to investors being able to buy or sell the same product at different venues. However, with fragmented trading across multiple exchanges it remains unknown at which of the exchanges an eventual order will arrive. We argue that as a result of this market makers send the same order to multiple exchanges to increase execution probabilities and therefore profits. This implies that we may overestimate the volume in the market if we combine the quoted volume available at each exchange as some of the orders will be withdrawn when the complementary order at another exchange gets filled. The volume arising from multiplication of such orders is what we call delusive liquidity. We propose three approaches for measuring the degree of delusive liquidity in European Equity order books, one intra-exchange and two inter-exchange approaches. Using the intra-exchange procedure results in the highest estimates of delusive liquidity. The inter-exchange measures remain very basic and should be applied as rough guidelines for comparatively analysing exchanges. We however, proof the existence of delusive liquidity by one of the inter-exchange measures. Overall we conclude the order books in Europe do not yet contain high degrees of delusive liquidity, partly explained due to the lack of fragmentation in Europe. The main traditional exchange for each country still regularly has over 65% market share (compared to f.e. 25% in USA), indicating competition has yet come up to speed in Europe.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:83 economics
Programme:Industrial Engineering and Management MSc (60029)
Link to this item:http://purl.utwente.nl/essays/66319
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