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"Competing on Speed” (Dec 2017).

(with Thomas Philippon) Econometrica forthcoming. Project awarded with a grant from the Smith Richardson Foundation. NBER Working Paper 17652. AEA, WFA, Paper, Online Appendix

We analyze trading speed and fragmentation in asset markets. In our model, trading venues make technological investments and compete for investors who choose where and how much to trade. Faster venues charge higher fees and attract speed-sensitive investors. Competition among venues increases investor participation, trading volume, and allocative efficiency, but entry and fragmentation can be excessive, and speeds are generically inefficient. Regulations that protect transaction prices (e.g., Securities and Exchange Commission trade-through rule) lead to greater fragmentation. Our model sheds light on the experience of European and U.S. markets since the implementation of Markets in Financial Instruments Directive and Regulation National Markets System.

"An Equilibrium Valuation of Bitcoin and Decentralized Network Assets" (New paper Mar 2018).

(with Andrea Buraschi). 2018 NBER Asset Pricing SI. Paper

We address the valuation of bitcoins and other blockchain tokens in a new type of production economy: a decentralized financial network (DN). An identifying property of these assets is that contributors to the network trust (miners) are compensated in units of the same asset that are used by consumers of network applications, which we call unity. As a result, the overall production (hashrate) that affect network trust and the bitcoin price are jointly determined. We characterize the demand for bitcoins and the supply of resources that secure the network and show that the valuation of bitcoins can be obtained by solving a fixed-point problem and study its determinants. We show that the unity property induces “price-hashrate spirals” that amplify the price impact of demand and supply shocks vis-à-vis traditional assets.

"Chasing Private Information" (new version Apr 2018)

(with Marcin Kacperczyk). R&R Requested by The Review of Financial Studies. WFA 2016, 2017 NBER LTAM, 2017 NBER Asset Pricing SI, FIRS 2017. Paper.

Using over 5000 equity and option trades unequivocally based on nonpublic information about firm fundamentals, we find that widely used adverse selection signals display abnormal values on days with informed trading. Volatility and volume values are abnormally high, whereas illiquidity values are low, both in equity and options markets. Signals are more sensitive to informed trading in options markets and before unscheduled corporate announcements. We characterize cross-sectional responses based on the sign, type, and duration of private information. Evidence from the U.S. Securities and Exchange Commission (SEC) Whistleblower Reward Program addresses potential selection concerns.

"Inside Insider Trading" (new paper Mar 2018)

(with Marcin Kacperczyk). Paper.

How do insider traders act on private information? Despite the breadth of the theoretical literature analyzing this issue, direct evidence of insiders’ behavior is scarce as private information sets and corresponding trades are almost never observable. We address this identification challenge by utilizing a unique hand-collected sample of insider trading cases prosecuted by the U.S. Securities Exchange Commission (SEC). We find evidence that insider traders strategically time when to trade after receiving tips about firm fundamentals. They also seek to minimize their price impact by splitting their trades, as in Kyle’s model, and manage their trades’ size according to prevailing liquidity conditions. The value and type of information, not only its sign, both play a crucial role in designing trading strategies. Individual characteristics, such as investing expertise and age, also play an essential role. By exploiting the adoption of the SEC Whistleblower Reward Program, we find evidence that insider traders (i) react to higher enforcement risk by waiting to trade and splitting their trades further, and (ii) concentrate on information of higher value. Thus, insider trading enforcement may hamper stock price informativeness.

"Does Central Clearing Affect Price Stability? Evidence from Nordic Equity Markets"

(with Albert Menkveld and Marius Zoican). R&R requested by The Journal of Financial Economics. Paper

We investigate the effects of introducing a central clearing counterparty (CCP) on price volatility by adopting as an experimental construct the 2009 clearing reform in three Nordic markets. A key feature of this event is that the transition from bilateral to central clearing was mandatory for all market participants. We find that, relative to similar European stocks, price volatility in these Nordic equities experience an economically significant decline of 8.8% relative to pre-reform levels. The decrease in volatility is more pronounced for stocks with higher margin cost impact, consistent with the predictions of recent dynamic asset pricing models. We also find that the reform induces a sharp decline of 11% in trade volume, but no deterioration of market quality as captured by measures of trading costs and price informativeness. Overall, our results highlight that the adoption of central clearing enhances price stability. Our results also suggest that there is an important coordination role for policy as, when given the option, investors failed to voluntarily clear trades in the CCP.

"SPEED, FRAGMENTATION, AND ASSET PRICES" (new version coming Apr 2018).

AFA, WFA, SFS Cavalcade. Paper, Online Appendix

We study the consequences of trading fragmentation and speed on liquidity and asset prices. Trading venues invest in speed-enhancing technologies and price trading services to attract investors. Investors trade due to preference shocks. We show how the resulting market organization affects asset liquidity and the composition of par- ticipating investors. In a consolidated market, speed investments raise liquidity and prices. When markets fragment, liquidity and asset prices can move in opposite directions. We also show how mechanisms that protect execution prices, such as the SEC’s trade-through rule, can decrease price levels and trading volume relative to unregulated markets. Our results suggest that recent regulatory reforms in secondary markets may have unintended negative consequences for public corporations.

"INFORMATION AND LIQUIDITY TRADING AT OPTIMAL FREQUENCIES" (under revision).

This paper studies an asset market where, as in major world exchanges, informed and liquidity investors continuously control the timing of orders and whether to take or provide liquidity. In equilibrium, investors demand and supply liquidity simultaneously, following distinctive time-varying patterns previously found in experiments. The resulting linkages between prices, order frequency and depths shed light on empirical regularities. By nesting limit-order and dealer markets, I find that the speed of information transmission is higher in the former and increases with investor sophistication. Evidence from proprietary NYSE data provides support for the implied liquidity provision behavior of investors.

Work in Progess

  • "Information Spillovers" (with Marcin Kacperczyk)
  • "Shocking Trust" (with Marcin Kacperczyk)
  • "Decentralized Finance"
  • " The Value of Decentralized Networks" (with Andrea Buraschi)

NON-PEERED REVIEWED

  • "Speed Competition and Fragmentation in Financial Markets" (Fall 2012), Center for the Study of Financial Regulation, University of Notre Dame.
  • "Dilemas de la Politica Comercial Externa Argentina" (with Roberto Bouzas) 2003, Siglo XXI. Amazon.com link.

POLICY COMMENTS

  • Comment to the SEC on Reg NMS Rule 611 (April 2015).

RECENT DISCUSSIONS

  • Discussion of: "The Failure of a Clearinghouse: Empirical Evidence”, by Vincent Bignon and Guillaume Vuillemey, FIRS Meetings, Hong Kong, June 6, 2017.
  • Discussion of: "Smart Settlement”, by Mariana Khapko and Marius A. Zoican, 2nd Sydney FIRN MMM. April 7, 2017.
  • Discussion of: "The Causal Impact of Market Fragmentation on Liquidity", By Peter Haslag and Matthew Ringgerberg, AFA Meetings, San Francisco, January 4, 2016.
  • Discussion of: "Welfare and Trading Frequency in Dynamic Double Auctions", By Dongzi Du and Haoxiang Zhu, WFA, Seattle, June 19, 2015.
  • Discussion of: "Transparency and Distressed Sales under Asymmetric Information", By William Fuchs, Aniko Ory, and Andy Skrzpacz, Paul Woolley Conference, LSE, June 4, 2015.
  • Discussion of: "Equilibrium High-Frequency Trading" by Biais, Bruno, Thierry Foucault and Sophie Moinas, Paul Woolley Conference, LSE, June 8, 2012.
  • Discussion of: "Liquidity: What you see is What you Get?" by Kervel, Vincent, Stern Microstructure Conference, NYU, June 1, 2012.
  • Discussion of: "Trade Dynamics in the Market for Federal Funds" by Afonso, Gara and Ricardo Lagos, Paul Woolley Conference, LSE, June 9, 2011.
  • Discussion of: "How Wise are Crowds? Insights from Retail Orders and Stock Returns" by Kelley, Eric and Paul Tetlock, Five Star Conference, NYU, December 3, 2010.
  • Discussion of: "Is Market Fragmentation Harming Market quality?" by O'Hara, Maureen and Mao Ye, Western Finance Association, June 22, 2010.