Limit Order Placement by High-Frequency Traders

This study, conducted by the University of California and the University of Sydney used a unique dataset consisting of limit order placement, execution, and cancellations on Nasdaq to examine liquidity provision by high-frequency trading (HFT) firms, which is a central issue in the ongoing debates about HFT.

The study shows that HFT firms more effectively use order cancellation to strategically manage their limit orders in anticipation of short-term price movements than non-HFT firms. HFT firms increase their liquidity provision during periods of high volatility; their liquidity provision is less affected by order imbalance shocks than that of non-HFT firms.

Overall, the results indicate that HFT limit orders exert a stabilizing influence on markets.

Read the full study here.

FSB report on OTC derivatives Trade Reporting

This peer review provides an update on the implementation of G20 requirements for trade reporting in over-the-counter (OTC) derivative markets. It shows the majority of FSB member jurisdictions have trade reporting requirements in place and calls on jurisdictions that have not fully implemented reporting requirements to do so promptly. Legal and regulatory barriers to complete reporting continue to be a concern. FSB members have agreed that jurisdictions should address legal barriers to reporting by June 2018, that masking of counterparty-identifying data be discontinued by end-2018, and that by June 2018 at the latest all jurisdictions should have legal frameworks in place to permit access to data held in a domestic trade repository by relevant authorities (whether domestic or foreign). There remain a number of challenges in the quality and usability of trade repository held data. Notwithstanding these challenges, some authorities are starting to make good use of data for some regulatory purposes.

You can find the report here

Using sentiment data to develop a trading strategy

In this paper, Ronald Hochreiter of the Vienna University computed trading strategies based on market sentiment derived from the postings of stocktwits, one of the largest social media accounts following the developments on financial markets. It's a very good example of how data from social media can be used to implement trading strategies.

Read the full study here.

Using short selling and hedge fund positions as predictive powers

In this study, the researchers from the Bejiing School of finance exploit the information contained in the joint analysis of the long and short sides of hedge fund trading. They state that opposite changes in short interest and hedge fund holdings are likely driven by information, whereas simultaneous increases (decreases) in short interest and hedge fund holdings are likely motivated by hedging (unwinding) incentives. This intuition allows to utilize short selling and hedge fund holding information to identify informed long and short demand.
Using this identification strategy, the researchers show that informed demand changes have high predictive power for returns.

Read the full study here

The Fundamental Theorem of Derivative Trading

In this study, the researchers from the University of Copenhagen revisit the calculation to allign delta hedged option portfolio's with implied volatilities and create a new version of the Fundamental Theorem

Read the full study here

Further dissection of the flash crash

In this study the researchers from the university of Nice take a deeper look at the flash crash and conclude that the market is, even without market makers, resilient and favors a recovery. They also conclude that a ban on short-selling reduces short term volatility. Read the full article here

Study on price pressure and liquidity providing

It's nice when providers of academic research have their own blog to outline and summarize their papers. Albert Menkveld, professor in Finance at the VU in Amsterdam has a let's say "Zen" designed blog and saves us the trouble of writing a long article ourselves. So click here for the abstract from the blog and in there, the related study.

The impact of trader behavior on option volatility

This is a 2014 study conducted by the Chienhsin University. They conducted an empirical study on the impact of trader types (retail investors, institutional investors, market makers) on the option volatility pricing on the index option (TXO) traded on TAIFEX. Some of the findings are pretty obvious (institutional investors make better decisions than retail investors), but it is an interesting study to determine if an adjustment in volatlilty pricing is warranted depending on the nature of trading activity. The study also explores the (possible) added value of market makers in an index product.

Click here for the study.