Martin Haferkorn

The Effect of Single-Stock Circuit Breakers on the Quality of Fragmented Markets

Since the May 6th, 2010 flash crash in the U.S., appropriate measures ensuring safe, fair and reliable markets become more relevant from the perspective of investors and regulators. Circuit breakers in various forms are already implemented for individual markets to ensure price continuity and prevent potential market failure and crash scenarios. However, coordinated inter-market safeguards have hardly been adopted, but are considered essential in a fragmented environment to prevent situations, where main markets halt trading but stock prices continue to decline as traders migrate to satellite markets. The objective of this paper is to empirically study the impact of circuit breakers in a single-market and inter-market setup. We find a decline in market volatility after the trading halt in the home and satellite market which come at the cost of higher spreads. Moreover, the satellite market’s quality and price discovery during CBs is weakened and only recovers as the other market restarts trading.

Seasonality and Interconnectivity Within Cryptocurrencies - An Analysis on the Basis of Bitcoin, Litecoin and Namecoin

The market development of cryptocurrencies illustrates an institutional change how payments can be released and received without the need of any intermediary or trusted central party to clear virtual transactions. As academia focuses mostly on Bitcoin, the increased money demand within cryptocurrencies, its linkages, the wide range of possible channels to release and receive executed payments (payment patterns) and the wide range of different underlying motivations why cryptocurrencies are demanded to release payments (payment behavior) is still uncovered. One might assume that payment patterns and payment behavior converges in the future as soon as the experimenting phase would have cooled down. However we observe that Bitcoin shows a strong, Litecoin a weak and Namecoin no weekday seasonality. By analyzing observed number of payments directly (between these cryptocurrencies) and indirectly (via the Bitcoin exchange-rate) we find no relationship. We conclude on these findings that payment patterns and payment behaviors on the basis of cryptocurrencies Bitcoin, Litecoin and Namecoin continue to diverge.

Managing Excess Volatility: Design and Effectiveness of Circuit Breakers

We investigate different designs of circuit breakers implemented on European trading venues and examine their effectiveness to manage excess volatility and to preserve liquidity. Specifically, we empirically analyze volatility and liquidity around volatility interruptions implemented on the German and Spanish stock market which differ regarding specific design parameters. We find that volatility interruptions in general significantly decrease volatility in the post interruption phase. Unfortunately, this decrease in volatility comes at the cost of decreased liquidity. Regarding design parameters, we find tighter price ranges and shorter durations to support volatility interruptions in achieving their goals.

High-frequency trading and its role in fragmented markets

Securities trading underwent a major transformation within the last decade. This transformation was mainly driven by the regulatory induced fragmentation and by the increase of high-frequency trading (HFT). On the basis of the electronic market hypothesis, which poses that coordination costs decline when markets become automated, and the efficient market hypothesis in its semi-strong form, we study the effect of HFT on market efficiency in the European fragmented market landscape. In doing so, we further incorporate the realm of financialization, which criticizes the increase in transaction speed. By conducting a long-term analysis of CAC 40 securities, we find that HFT increases market efficiency by leveling midpoints between Euronext Paris and Bats Chi-X Europe. On the basis of a cross-country event study, we analyze the effect of the German HFT Act. We observe that the midpoint dispersion of blue chip securities between the two leading venues Deutsche Boerse and Bats Chi-X Europe increased. We conclude that HFT increases market efficiency in the European market landscape by transmitting information between distant markets.

Ensuring Market Integrity and Stability: Circuit Breakers on International Trading Venues

Circuit breakers are important mechanisms used to prevent excess short-term volatility and to ensure price continuity. This article presents the results of an international survey on the design and application of circuit breakers on trading venues worldwide. The majority (86%) of the responding trading venues apply circuit breakers and thereby aim to ensure investor protection and increase market integrity and stability. On cash markets, market-wide trading halts and volatility interruptions are the most prevalent types of circuit breakers (72%). On derivatives markets, most exchanges coordinate their circuit breaker with their cash market (40%), followed by marketwide trading halts (20%) and volatility interruptions (13%). Most circuit breakers do not differentiate between upward and downward market movements. There is also support for greater coordination of circuit breakers across venues, and a few exchanges (32%) already coordinate their circuit breakers with other venues.

The German High-Frequency Trading Act: Implications for Market Quality

With the introduction of the High Frequency Trading (HFT) Act in May 2013, Germany has become the first country that regulates securities trading firms based on their infrastructure and order book activity characteristics. In order to increase the transparency of HFT firms and to facilitate market integrity, all non-regulated proprietary trading firms that rely on low latency connections, high intraday trading message volumes and autonomous decision making systems are required to be authorized by German regulators and fulfill a variety of organizational obligations. This study analyzes the impact of this act by identifying whether a change in daily trading messages was observable and how this change impacted order book liquidity levels. We find that the German HFT Act has successfully reduced the amount of intraday trading messages leaving trade executions only marginally affected. However, a large fraction of those messages lost were providing high quality liquidity at competitive limits and thereby decreasing implicit transaction costs, which results in increased bid-ask spreads after the introduction. But as those messages were of negligible sizes, the overall liquidity supply to the order book, measured by the order book depth level, remains unaffected. Therefore, consequences originating from the absence of unregulated HFT could be considered marginal for securities markets quality.

Humans vs. Algorithms – Who Follows Newcomb-Benford’s Law Better with Their Order Volume?

Newcomb-Benford’s Law (NBL) is a well known regularity in the distribution of first significant digits (FSD) and therefore research in this field is manifold. As of 2012 research in the domain of financial markets is quite scarce, especially in the field of algorithmic trading. We pose the question whether order submission volumes of algorithmic traders and human traders follow NBL. Results in this context might help regulators to detect suspicious market activity and market participants to quantify the amount of algorithmic trading. Our findings indicate that the submitted order volumes of both groups follow NBL more than the uniform distribution. Comparing these two groups, we give a proof that algorithmic traders match NBL better than human traders, as human traders tend to overuse the FSD five.