Ingrid M. Werner

Home bias and high turnover

Abstract This paper documents the available evidence on international portfolio investment in five OECD countries. We draw three conclusions from the data. First, there is strong evidence of a home bias in national investment portfolios despite the potential gains from international diversification. Second, the composition of the portfolio of foreign securities seems to reflect factors other than diversification of risk. Third, the high volume of cross-border capital flows and the high turnover rate on foreign equity investments relative to turnover on domestic equity markets suggests that variable transactions costs are an unlikely explanation for home bias.

Nontraded assets in incomplete markets : Pricing and portfolio choice

This paper examines portfolio choice and asset pricing when some assets are nontraded, for instance when a country cannot trade claims to its output on world capital markets, when a government cann ...

The trades of NYSE floor brokers

Abstract This paper studies the contribution of NYSE floor brokers to the Exchanges agency auction market. Floor brokers represent 44%, specialists 11%, and system orders 45% of the value of all executed orders in our sample. We analyze how the cross-sectional distribution of floor broker trading depends on liquidity, block volume, on- and off-exchange competition, volatility, and order flow internalization. Floor brokers participate in large trades, primarily in liquid stocks, and they trade more when volatility is high. They provide two-sided liquidity to the market and often provide liquidity that would otherwise have been supplied by NYSE specialists.

NYSE order flow, spreads, and information ☆

Abstract This paper uses unique NYSE audit trail data to evaluate spreads and information content for different order types. Actual spreads are positive for liquidity-demanding orders and negative for liquidity-supplying orders after controlling for order direction. However, because a large fraction of liquidity-demanding orders get price improvement, the actual spread for liquidity-demanding orders is up to 50 percent less than the Lee and Ready (1991) algorithm would suggest. Regression results show that the order composition of trades affects traditional measures of spreads and information. They also show that NYSE non-displayed liquidity reduces trading costs facing market orders, and that liquidity-demanding floor broker orders are the most informative order type.

Diving Into Dark Pools

This paper examines unique data on dark pool activity for a large cross-section of US stocks in 2009. Dark pool activity is concentrated in large firms, stocks with high share volume, high price, low spreads, high depth, and low short-term volatility. NASDAQ (AMEX) stocks have significantly higher (lower) dark pool activity than NYSE stocks controlling for size, share volume, and price. For a given stock, dark pool activity is significantly higher on days with higher share volume, higher depth, and lower intraday volatility. Dark pool activity is significantly lower for days with larger order imbalances relative to share volume and larger absolute returns. We find no evidence supporting the hypothesis that dark pool activity has a detrimental effect on market quality.

Dark Pool Trading Strategies, Market Quality and Welfare

We model a financial market where traders have access both to a fully transparent limit order book (LOB) and to an opaque Dark Pool (DP). When a DP is introduced to a LOB market,orders migrate to the DP from the LOB, but overall trading volume increases. Moreover, inside quoted depth in the LOB decreases, but quoted spreads tend to narrow in deep books and widen in shallow ones. DP market share is higher when LOB depth is high, when LOB spread is narrow, when the tick size is large and when traders seek protection from price impact. When depth decreases on one side of the LOB, liquidity is drained from the DP. When Flash orders provide select traders with information about the state of the DP, more orders migrate from the LOB to the DP but overall market quality improves.

Comment on ‘Some Evidence that a Tobin Tax on Foreign Exchange Transactions may Increase Volatility’

Global turnover in foreign exchange markets averaged

Sub-Penny and Queue-Jumping

1.2 trillion per day according to the most recent estimates available from the Bank for International Settlements.1 Yet, cross-border trade of goods and services accounts for less than 5 percent of the total trading. While it is difficult to get precise estimates on hedging, roughly 20 percent of total trading is aimed at hedging against future exchange rate changes. The remaining roughly 75 percent of total turnover in global foreign exchange markets is believed to be related to short or long term exchange rate speculation. The large fraction of global turnover in currency markets that is unrelated to trade or hedging has lead economists and policy markets to the conjecture that speculation is responsible for the perceived recent increase in volatility in foreign exchange markets. Several economists, most prominently Nobel Laureate Dr. James Tobin, have advocated levying a tax (a “Tobin tax”) on foreign exchange transactions to reduce volatility induced by exchange rate speculation. Recently, several European countries spearheaded by France have debated a proposed legislation to impose a tax on currency transactions.2 However, to date, there is no strong empirical evidence that an increase in transactions costs (which would be the result of a Tobin tax) would significantly dampen volatility. On the contrary, Umlauf (1993) finds that a transactions tax on stock trading, the so called “puppy-tax”, imposed in Sweden between 1984 and 1991 actually caused an increase in volatility and a dramatic reduction in home-

Capital income taxation and international portfolio choice

Sub-Penny Trading (SPT) is a form of dark trading that allows traders to undercut displayed liquidity. We distinguish between SPT that is queue jumping (QJ) and mid- crossing (MID) and find that QJ is higher for NASDAQ than NYSE stocks. Consistently with Buti, Rindi, Wen and Werner (2013), QJ is positively related to depth and negatively related to stock price. We also find that QJ is associated with improved lit market quality, especially for large capitalization stocks. Sub-penny quotes are allowed for stocks priced below

The Twilight Zone: OTC Regulatory Regimes and Market Quality

1.00, and we use this fact to show that QJ increases, the spread improves but depth deteriorates as the price of a stock crosses from above to below (