If all intermediaries enter the same market-making “bet” on the same side, fast-moving capital gets tied up in a crowded trade. This creates systemic risk for a central clearing party (CCP) since multiple traders might default when the bet turns extremely sour. The CCP then has to unwind the...

We solve a Stackelberg game where a large uninformed seller executes optimally, fully cognizant of the response of Cournot-competitive market makers. The game therefore endogenizes both demand and supply of liquidity. The closed-form solution yields several insights. First, stealth trading is...

The electron microscope improved our vision by a factor of one million. Humans could finally see atoms. This study aims for a similar leap by studying trades at nanoseconds, a million times more precise than often used milliseconds. This enables one to observe asset re-allocations among...

Liquidity suppliers lean against the wind. We analyze whether high-frequency traders (HFTs) lean against large institutional orders that execute through a series of child orders. The alternative is HFTs trading "with the wind," that is, in the same direction. We find that HFTs initially lean...

Counterparty risk could hamper trade and worsen a financial crisis. A central clearing party (CCP) insures traders against counterparty default and thus benefits trade. Default of the CCP however becomes a new systemic risk. CCP risk management does not account for risk associated with crowded...

A breakdown of cross-market arbitrage activity makes markets more fragile, and could result in price crashes. We provide supportive evidence for this novel channel based on a high-frequency analysis of the most salient crash in recent history: The Flash Crash. We further show that such event can...

U.S. trading in non-U.S. stocks has grown dramatically. Round-the-clock, these stocks trade in the home market, in the U.S. market and, potentially, in both markets simultaneously. We develop a general methodology based on a state space model to study 24-hour price discovery in a multiple...

After more than fifteen years of Chinese equity markets, we study how variance, covariance, and correlations have developed in these markets relative to world markets, based on the dynamic conditional correlation (DCC) model of Engle (2002). Chinese markets offer A-shares to domestic investors...

I review the recent high-frequency trader (HFT) literature to single out the economic channels by which HFTs affect market quality. I first group the various theoretical studies according to common denominators and discuss the economic costs and benefits they identify. For each group, I then...

We characterize the dynamic fragmentation of U.S. equity markets using a unique dataset that disaggregates dark transactions by venue types. The 'pecking order' hypothesis of trading venues states that investors 'sort' various venue types, putting low-cost-low-immediacy venues on top and...