Narrow Results

In this paper, we develop a theory which applies to any market dynamics that satisfy a fair market assumption on the nullity of the average profit of simple market making strategies. We show that for any such fair market, there exists a martingale fair price which corresponds to the average liquidation value (at the ask or the bid) of an infinitesimal quantity of stock. We show that this fair price is a natural reference price to compute the ex post gain of limit orders. Using only the fair market assumption, we link the spread to the impact of market orders on the fair price. We use our definition of the fair price to build empirical tests of the relevance of this notion whose results are consistent with our theoretical predictions.

This empirical study on European stocks gives evidence about the practices of high frequency traders (HFTs) under market stress. In the absence of significant news, whatever the market conditions, they are the main contributors to liquidity with a participation of 80% in the market depth. They constitute 60% of the traded amounts, with an aggressive/passive ratio around 53%. We identify a change of regime in the presence of scheduled news that goes beyond the expected reaction to volatility variations. Moreover, in extreme situations, when non-HFTs have time to adjust their tactics, they act as liquidity providers in place of HFTs.

We first investigate the evolution of opening and closing auction volumes of US equities along the years. We then report the dynamical properties of pre-auction periods: the indicative match price is strongly mean-reverting because the imbalance is; the final auction price reacts to a single auction order placement or cancellation in markedly different ways in the opening and closing auctions when computed conditionally on imbalance-improving or worsening events; the indicative price reverts towards the mid-price of the regular limit order book but is not especially bound to the spread.

The new MiFID II regulation put in place in January 2018 has deeply modified the microstructure of European financial markets. In particular, new tick size tables have been created, leading to tick size modifications for hundreds of assets. In this work, we investigate the relevance of this new tick size regime for the assets traded on Euronext. To do so, we analyze the changes of transaction costs paid by investors under this new regulation. We find that from this viewpoint, MiFID II clearly induced an improvement of market quality.