Finance - Research Publications
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ItemClosing Mechanisms in European Equities(The University of Melbourne, 2023-06-01)This paper examines end-of-day trading mechanisms in European equity markets. Over the period January 2021 to September 2022, closing mechanisms account for around 18% of consolidated Euro volume in STOXX 600 stocks. Only continuous lit trading accounts for a larger fraction of activity. The high share of activity at the close is attributed to a range of factors including increases in assets under management in index and quantitative investment strategies and in Exchange Traded Funds. Closing mechanisms exhibit notably higher market share on rebalance and month-end days. The market share of closing mechanisms increases to 40% and 30% on rebalance and month-end days, respectively. These increases are likely due to benchmarking practices of index and other institutional traders. The market share of closing mechanisms decreases significantly on volatile and less liquid days. Increased activity in closing auctions has focused attention on the typically higher cost of trading in primary exchange closing auctions. Alternative closing mechanisms have emerged to compete with primary exchange auctions. Despite the emergence of competing venues, primary exchange closing auctions continue to capture the lion’s share of closing volume, representing about 84% of all closing activity. Why have alternative closing mechanisms failed to attract significant trading volume despite offering cheaper services? And why have some alternative mechanisms been more successful than others? The answers to these questions lie in the differing perspectives of market participants about the potential impact of fragmentation at the close, the ability to capture the benefits of the lower fees, and differences in the market structure of the mechanisms.
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ItemRetail Trading in European Equity Markets(University of Melbourne, Faculty of Business and Economics, 2023)Recent growth in retail trading in global equity markets has drawn considerable attention to the execution of retail flows. European market operators offer diverse retail trading mechanisms: both retail-specific mechanisms and all-to-all trading mechanisms that allow the interaction of all trader types. Retail-specific trading mechanisms are categorized into Single Market Maker and Competing Market Maker mechanisms. Markets also differ on other dimensions such as the way market makers compete, the number of reference markets, order flow segmentation, explicit costs, and Payment for Order Flow (PFOF). Using the findings from the existing literature this paper argues in favor of competition between market makers, the use of a consolidated market view as the reference price and less segmentation. It also raises questions about potential conflicts arising from low or zero explicit costs and PFOF. The paper also recommends that policy makers can improve retail execution quality by requiring additional transparency around retail trades and implementing a consolidated tape.
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ItemMeasuring Financial Wellbeing with Self-Reported and Bank Record Data(WILEY, 2022-06)We develop scales of the financial well‐being of customers of a major Australian bank using self‐reported survey data matched to customer financial records. Using item response theory (IRT) models, we develop: (1) a Reported Financial Wellbeing Scale from information about people’s experiences and perceptions of financial outcomes; and (2) an Observed Financial Wellbeing Scale from financial record measures of customers’ account balances, net spending and payment problems. Each scale reliably differentiates between a wide range of outcomes, and the scale components have similar power to discriminate. We confirm the validity of the scales by estimating predictive models using other measurable characteristics.
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ItemComment on: Price Discovery in High Resolution(OXFORD UNIV PRESS, 2021-01-01)The microstructure literature comprises a rich set of papers that seek to understand pricing dynamics at a granular level, commonly exploring the joint dynamics of bids, asks and last sale prices. Its focus is on identifying innovations in prices and separating permanent price impacts from transient effects. Hasbrouck (1995) provides a tool that has been extensively utilized in the literature to examine these dynamics in many different market contexts over the last two decades.1 However, the evolution of markets over this period, most notably the exponential growth in the volume of data and the increasing importance of trading speed has made the application of Hasbrouck’s (1995) method and other related tools discussed in Hasbrouck (2018) more computationally and econometrically challenging. Hasbrouck (2018) offers a new approach to help overcome these challenges. In this comment, we briefly describe the evolution of markets and detail the challenges that these changes create for microstructure researchers and highlight the solution that Hasbrouck (2018) offers for these problems. We survey the literature that uses linear multivariate time-series models to understand high-frequency markets. We focus on three examples from the literature to discuss how estimation constraints have affected their modelling choices, describe the potential drawbacks of these choices and how Hasbrouck’s (2018) method can alleviate these constraints. We deliberately select papers that cover different asset classes: cash equities, fixed income and equity options. We hope that our discussion will help provide guidance about the costs and benefits of different modelling choices for future researchers confronted with a variety of methods to answer related research questions. We conclude by considering the implications of Hasbrouck’s 2018 paper for the current policy debate on market data costs.
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ItemDoes Financial Market Structure Affect the Cost of Raising Capital?(CAMBRIDGE UNIV PRESS, 2021-08)Abstract We provide evidence on market structure and the cost of raising capital by examining changes in market structure in U.S. equity markets. Only the Order Handling Rules (OHR) of the Nasdaq, the one reform that reduced institutional trading costs, lowered the cost of raising capital. Using a difference-in-differences framework relative to the New York Stock Exchange (NYSE) that exploits the OHR’s staggered implementation, we find that the OHR reduced the underpricing of seasoned equity offerings by 1–2 percentage points compared with a pre-OHR average of 3.6%. The effect is the largest in stocks with the largest reduction in institutional trading costs after the OHR.