Finance - Research Publications

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    Emotional Engagement and Trading Performance
    Bossaerts, P ; Fattinger, F ; Rotaru, K ; Xu, K (INFORMS, 2020-04-27)
    Extensive research in neuroscience proves that rational decision-making depends on accurate anticipative emotions. We test this proposition in the context of financial markets. We replicate a multiperiod trading game that reliably generates bubbles, while tracking participants’ heart rate and skin conductance. We find that participants whose heart rate changes in anticipation of trading at inflated prices achieve higher earnings. In contrast, when such trades precede heart rate changes, earnings decrease. Higher (lower) earnings accrue to participants whose skin conductance responds to the market value of stock (cash) holdings. Our findings demonstrate that emotions are integral to sound financial decision-making.
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    Closing Mechanisms in European Equities
    Aramian, F ; Comerton-Forde, C (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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    Retail Trading in European Equity Markets
    Aramian, F ; Comerton-Forde, C (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.