T3: Complex Markets: Regulation and Incentives in Secondary Market Design

Not too long ago, the trading of securities in most economies was organized along a simple architecture containing national/regional stock exchanges, typically operating as a utility, and an over-the-counter bond market, involving large financial institutions. Over the past 20 years, this market infrastructure has seen a dramatic change. Today markets are increasingly complex, and comprise competing, for-profit exchanges, multilateral trading facilities (or electronic communication networks), crossing networks, and financial institutions internalizing their own order flow. In this project we will analyze different aspects of these complex markets, focusing on their liquidity, informational efficiency, and stability. Portfolio choices and observed asset prices. Regulatory decisions (such as pre- and post-trade transparency rules) and technological advances (e.g., algorithmic trading models and internet-based competition among venues) have fundamentally altered the operations of secondary markets, and these changes are widely expected to accelerate further over the next decade.

Our project will focus on two central features of modern secondary markets: high (and a constantly increasing) level of order flow fragmentation resulting from multiple trading venues competing with each other for liquidity, and a disordered set of regulatory rules, often imposed ad-hoc, or created by self-regulation at the venue level. The combination of these two features generates the lead question of our project: what are the consequences of competitive pressures among trading venues for the quality and integrity of markets? Do changes in market design, often undertaken in response to competitive pressures, encourage a “race to the bottom”? This team project will focus on the equity market microstructure in a fragmented landscape, addressing market design issues and the consistency between regulator-imposed and self-imposed trading rules. Topics examined in the project include high-frequency trading, short sale bans, tick size restrictions, and the trading mechanisms for SME stocks.

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
234Alejandro Bernales, Nicolas Garrido, Satchit Sagade, Marcela Valenzuela, Christian WestheideTrader Competition in Fragmented Markets: Liquidity Supply versus Picking-off Risk2018 Financial Intermediation, Financial Markets, Systemic Risk Lab, Experiment Center Fragmentation, Competition, Liquidity, Price Efficiency