How does venue design shape retail trading outcomes?

(with Carole Comerton-Forde)

SSRN

Abstract:: We examine how retail trading venue design affects execution quality in a fragmented market without a consolidated tape. We compare a venue where market makers compete on price relative to a single-venue reference price with one where market makers trade at a multi-venue reference price without price improvement. Price competition yields lower trading costs (3.3 bps vs. 4.8 bps). Conditioning on identical reference prices, the venue allowing price improvement continues to deliver lower costs. Execution shortfalls relative to the European Best Bid and Offer, concentrated on the no-improvement venue, total approximately EUR 1.5 million annually for retail investors.

High-Frequency Traders and Single-Dealer Platforms

(with Lars Norden)

SSRN

Abstract:: High-frequency traders (HFTs) mainly operate on public exchanges, where multiple third-party buying and selling interests interact with each other. Following European regulatory changes (Markets in Financial Instruments Directive II), HFT single-dealer platforms have emerged on which HFTs conduct bilateral trading as dealers. We find that trading on HFT dealer platforms is detrimental to liquidity on public stock exchanges. HFTs manage inventory imbalances from their dealer operations by trading more aggressively and reducing their liquidity supply on exchanges, which harms liquidity.

Costs and Benefits of Trading with Stock Dealers: The Case of Systematic Internalizers

(with Lars Norden)

European Financial Management

Abstract:: Systematic internalizers are single-dealer platforms run by investment firms that trade out of their inventories by internalizing the trades off exchanges. We analyze the determinants of dealers' market shares and trading costs. We find that dealer trades have lower price impacts than exchange trades, consistent with uninformed traders seeking out dealers. Due to their ability to avoid trading with informed investors, dealers often undercut the exchange bid–ask spread when the spread is wide and the tick size is not binding. Dealers can, therefore, offer lower trading costs and gain a higher market share relative to exchanges.

Anatomy of Systematic Internalizers and Price Efficiency

(Sole-author)

SSRN

Abstract:: This study investigates the characteristics of systematic internalizers and their impact on price efficiency. The results show market making firms are more likely to operate as SIs. Using high-frequency measures of price efficiency, I find evidence that SIs lead to more informative prices on exchanges. The improved price efficiency is driven by those SIs with the highest level of market making activities on exchanges. Understanding the impact of SIs on price efficiency is important, since the increased market share in off-exchange trading through SIs has raised regulatory concerns about their roles in equity markets.