Research

How does venue design shape retail trading outcomes?

with Carole Comerton-Forde

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' single-dealer platforms and market quality

with Lars Norden

Forthcoming in the Journal of Financial Markets

Abstract. High-frequency traders (HFTs) mainly operate on public exchanges. Since the European regulatory changes in 2018 (Markets in Financial Instruments Directive II), some HFTs began operating Systematic Internalizers (SIs), i.e., single-dealer platforms where clients trade against the dealer's inventory. Using Swedish equity market data, we show that higher HFT dealer-platform activity reduces displayed exchange liquidity: quoted spreads widen and depth falls. Effective spreads are largely unchanged for HFTs but increase for non-HFT traders. Price efficiency improves as return autocorrelations and excess variance ratios move closer to random-walk benchmarks. Evidence suggests HFT dealers' inventory management is the main channel behind these results.

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

with Lars Norden

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

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.