Publications
How fast should trades settle?, 2019, with Mariana Khapko
Management Science, Forthcoming [slides] [The Conversation (French) coverage]
Management Science, Forthcoming [slides] [The Conversation (French) coverage]
Does faster settlement benefit markets? Real-time settlement, coupled with a flexible option-like penalty for failures-to-deliver, disciplines competition on securities lending markets, reduces borrowing costs, and therefore improves market quality.
Need for Speed? Exchange Latency and Liquidity, 2017, with Albert J. Menkveld
Review of Financial Studies, 30 (2017), 1188--1228 [slides] [Bloomberg, VoxEU coverage]
Review of Financial Studies, 30 (2017), 1188--1228 [slides] [Bloomberg, VoxEU coverage]
Speeding up the exchange does not necessarily improve liquidity. Since HFTs employ both market-making and arbitrage strategies, the net effect of a faster market depends on a security’s news-to-liquidity-trader ratio.
Too-International-to-Fail? Supranational Bank Resolution and Market Discipline, 2016, with Lucy Gornicka
Journal of Banking and Finance 65 (2016), 41--58 [slides] [VoxEU coverage]
Journal of Banking and Finance 65 (2016), 41--58 [slides] [VoxEU coverage]
Supranational regulators are more inclined to bail-out banks indebted towards international creditors because they take into account cross-border contagion. When banks' creditors are more likely to be bailed out, market discipline decreases.
Working papers
Liquid Speed: On-Demand Fast Trading at Distributed Exchanges, 2019, with Michael Brolley
[Medium post] [Machine Lawyering coverage]
[Medium post] [Machine Lawyering coverage]
Exchanges acquire excess processing capacity to tackle trading activity surges associated with zero-sum high-frequency trader (HFT) "duels." The idle capacity's opportunity cost is an externality of low-latency trading. On decentralized exchanges, HFTs acquire speed in real-time from peer-to-peer networks. The price of speed surges during activity bursts: Relative to centralized exchanges, HFTs acquire more speed, but for shorter timespans. Low-latency "sprints" speed up price discovery without harming liquidity. Overall, speed rents decrease and fewer resources are locked-in to support zero-sum HFT trades.
Analyst stock coverage is "crowded:" the most-covered 5% U.S. equities amount to 25% of earnings forecasts. Is information supply optimally distributed in financial markets? Coverage crowding emerges through strategic complementarity effects. For limited investor attention, analysts prefer to share a crowded space rather than "going against the wind" to cover more opaque assets. However, coverage skewness is excessive from the investors' perspective.
Do speed bumps curb speed investment? Evidence from a pilot experiment, 2019, with Mariana Khapko
In a market design pilot experiment conducted at the University of Toronto, we find that introducing a speed bump reduces arbitrageurs' investment in speed by 22%. However, conditional on an existing speed bump, imposing a longer order delay increases speed investment by 11%, as arbitrageurs try to outrace each other. The results directly speak to the current debate about over-investment in low-latency technology.
Funds use proceeds from lending out securities to offset management fees. If lending revenues are correlated with short-selling demand, security lending generates a hedging benefit that funds do not internalize. Investors are better off receiving dividends rather than fee discounts. Further, “free” funds may limit investors' ability to benefit from technological improvements. To improve revenue disclosure standards, efficiency in the asset management industry needs to improve beyond the point where zero-fee funds become sustainable.
Speed and Learning in High-Frequency Auctions, 2018, with Marlene Haas and Mariana Khapko
[The Conversation (French) coverage] [Josseph de la Vega Award 2016]
Revise and Resubmit at Journal of Financial Markets
[The Conversation (French) coverage] [Josseph de la Vega Award 2016]
Revise and Resubmit at Journal of Financial Markets
On high-frequency batch auctions markets, the HFT ``arms' race'' in speed stimulates price competition between arbitrageurs and improves liquidity.
Does Central Clearing Affect Price Stability? Evidence from Nordic Equity Markets, 2015, with Albert Menkveld and Emiliano Pagnotta
Revise and Resubmit at Journal of Financial Economics
Revise and Resubmit at Journal of Financial Economics
We provide evidence of the effects of introducing a central clearing counterparty (CCP) on price stability using a 2009 clearing reform in three Nordic equity markets. We find that volatility drops by 8.8% relative to pre-reform levels.