Gráfico du Jour: Liquidez de Bancos Europeos

(Fuente ESIEB Research, via Zero Hedge)

Paper: HFT y su impacto

High Frequency Trading and its Impact on Market Quality

Abstract:
This paper examines the impact of high frequency traders (HFTs) on equities markets. I analyze a unique data set to study the strategies utilized by HFTs, their profitability, and their relationship with characteristics of the overall market, including liquidity, price efficiency, and volatility. I find that in my sample HFTs participate in 77% of all trades and that they tend to engage in a price-reversal strategy. I find no evidence suggesting HFTs withdraw from markets in bad times or that they engage in abnormal front-running of large non-HFTs trades. The 26 high frequency trading (HFT) firms in the sample earn approximately $3 billion in profits annually. HFTs demand liquidity for 50.4% of all trades and supply liquidity for 51.4% of all trades. HFTs tend to demand liquidity in smaller amounts, and trades before and after a HFT demanded trade occur more quickly than other trades. HFTs provide the inside quotes approximately 50% of the time. In addition if HFTs were not part of the market, the average trade of 100 shares would result in a price movement of $.013 more than it currently does, while a trade of 1000 shares would cause the price to move an additional $.056. HFTs are an integral part of the price discovery process and price efficiency. Utilizing a variety of measures introduced by Hasbrouck (1991a, 1991b, 1995), I show that HFTs trades and quotes contribute more to price discovery than do non-HFTs activity. Finally, HFT reduces volatility. By constructing a hypothetical alternative price path that removes HFTs from the market, I show that the volatility of stocks is roughly unchanged when HFT initiated trades are eliminated and significantly higher when all types of HFT trades are removed.

Link al Paper

CoCos, ¿una alternativa?

Vox tiene un articulo sobre las ventajas y desventajas coditional covertibles, aka CoCos. Es interesante como el autor ilumina el panorama cuando los posiciona dentro de la estructura de incentivos de una empresa.

The CoCo suggestion is that equity holders will be incentivised to issue new additional equity early, in order to protect themselves against being wiped out by dilution, and from any manipulation to activate the trigger by CoCo holders hoping to benefit. Indeed, some of the proponents hope that the incentives to raise new issues in good times will be such as to make banks continuously well capitalised and to prevent CoCos being triggered except very rarely (and by the miscalculation of existing equity holders).

Paper: Commodities y Liquidez

Liquidity Commonality in Commodities

Abstract:
Commodities have become an important asset class. However there has been little focus on commodities in the literature as compared to stocks and bonds. We show, using data from 16 agricultural, energy, industrial metal, precious metal, and livestock commodities, that there is a strong systematic liquidity factor (liquidity commonality) in commodities. This existed at the start of our sample period in 1997 but has become stronger over time. We also find that systematic liquidity risk is an important determinant of commodity returns. Finally, there is no consistent relation between changes in systematic stock market liquidity and changes in systematic commodity liquidity.

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Paper: Trades, Inversores e información

To Trade or Not to Trade? Informed Trading with High-Frequency Signals for Long-Term Investors

Abstract:
When a long-term investor trades a slowly changing portfolio, she is not very time sensitive to when exactly she should place or change her bet. The value of the embedded optionality provided by this flexibility may be extracted by using high frequency information to choose when to trade (exercise the option). Mechanically, if the short-term view concurs with the trade, then the trade is placed. Otherwise, the investor waits for a more favorable environment. Strategic trade modification provides exposure to short-term signals without having to pay additional transaction costs and with no capacity limits. We implement our trading approach (Informed Trading) on real and simulated portfolios to illustrate its effect on portfolio performance. We show that realistic portfolios can achieve a five percent exposure to a high frequency signal. Long-term investors should no longer ignore high frequency information just because it is too expensive to trade on.

Link al Paper

¿Iliquidez paga?

David Merkel tiene un breve e interesante post sobre iliquidez, el cual comienza con un juego de palabras: no todo puede ser liquido; no todo deberia ser liquido; no todo sera liquido. Lo valioso es el relato de su experiencia:

(…)

Now, when I was a bond manager, because my client had a large amount of long noncallable liabilities, I bought less liquid debts when I received adequate compensation to do so, but not more than my client’s balance sheet could tolerate.  That allowed me to make better money for my client, but without increasing risk.  Hey, use the advantages that you have.

But remember, even if you understand the illiquid security perfectly well, but you don’t understand your own liquidity situation, you might find yourself in a situation where you have to sell, but few others understand the security, and no good bids are offered.

(…)

Phrasing it differently: we only hold illiquid assets, or illiquid amounts of assets when we know a lot more than the market. We have paid the barrier to entry, and are the heavy hitter now.  We make money off of superior knowledge, though illiquidity means that trades will be infrequent.

Más sobre CDS

Richard Portes en un articulo del estilo “yo lo vengo diciendo hace tiempo”, critica y propone la prohibición del Naked CDS (tener el CDS, pero no el bono -o uno de los bonos para el posterior delivery-)

(…)

Some say that naked CDS are justified because they add liquidity to the market. But is the extra liquidity worth the costs? And we now turn to these.

The most obvious argument against naked CDS is the moral hazard arising when it is possible to insure without an ‘insurable interest’ – as in taking out life insurance on someone else’s life (unless she is a key executive in your firm, say).

The most important argument is related to this moral hazard. Naked CDS, as a speculative instrument, may be a key link in a vicious chain. Buy CDS low, push down the underlying (e.g., short it), and take a profit from both. Meanwhile, the rise in CDS prices will raise the cost of funding of the reference entity – it normally cannot issue at a rate that won’t cover the cost of insuring the exposure. That will harm its fiscal or cash flow position. Then there will be more bets on default, or at least on a further rise in the CDS price. If market participants believe that others will bet similarly, then we have the equivalent of a ‘run’. And the downward spiral is amplified by the credit rating agencies, which follow rather than lead. There is clearly an incentive for coordinated manipulation, and anyone familiar with the markets can cite examples which look very much like this. The probability of default is not independent of the cost of borrowing – hence there may be multiple equilibria, with self-fulfilling expectations, as Daniel Cohen and I have argued.

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HFT: opinión de la Chicago Fed

El Banco de la Reserva Federeal de Chicago (Chicago FED) en uno de sus usuales ensayos trata el tema de High Frequency Trading (HFT), Controlling Risk in a Lightning-Speed Trading Environment

A handful of high-frequency trading firms accounted for an estimated 70 percent of overall trading volume on U.S. equities markets in 2009. One firm with such a computerized system traded over 2 billion shares in a single day in October 2008, amounting to over 10 percent of U.S. equities trading volume for the day. What are the advantages and disadvantages of this technology-dependent trading environment, and how are its risks controlled?

El trabajo hace hincapié en las posibles perdidas ocasionadas por este tipo de trading:

The high-frequency trading environment has the potential to generate errors and losses at a speed and magnitude far greater than that in a floor or screen-based trading environment.

Para terminar, la bibliografia de este ensayo no tiene desperdicio, cita un paper realizado en el 2007 llamado Does Algorithmic Trading improve Liquidity? y una nota periodistica, tambien del 2007, Error in Singapore Forced Unwinding of 110,000 trades.