In the summer of 2018 the shares of New Concept Energy and Avalon Holdings increased more than 500% and then fell back down without any news or rumours about the companies. Using court documents we reconstruct the trades by an alleged manipulator, we analyze his strategic trading behavior and how the market reacted to his trades. We find that the market on average was not able to identify the alleged manipulator’s trades and that his trading costs were lower than those of the other market participants. Consistent with Allen and Gale (1992) we find that the manipulator exhibits the same behavior as informed investors in Collin-Dufresne and Fos (2015), Kacperczyk and Pagnotta (2018), Garriott and Riordan (2019). We argue that Regulation SHO mandatory settlement deadline easily binds for small-cap stocks, making manipulation in these stocks more likely.
Information, Liquidity, and Dynamic Limit Order Markets: with Barbara Rindi and Duane J. Seppi
This paper describes price discovery and liquidity provision in a dynamic limit order market with asymmetric information and non-Markovian learning. In particular, investors condition on information in both the current limit order book and also, unlike in previous research, on the prior trading history when deciding whether to provide or take liquidity. Numerical examples show that the information content of the prior order history can be substantial. In addition, the information content of arriving orders can be non-monotone in both the direction and aggressiveness of arriving orders.
Optimal Market Access Pricing: with Barbara Rindi and Duane J. Seppi
We determine optimal market access pricing for an exchange or Social Planner. Exchanges optimally use rebate-based pricing (vs. strictly positive fees) when ex ante gains-from-trade and trading activity are low (high). Exchange rebate-based pricing increases (decreases) welfare when investor valuation dispersion and trading activity are low (high). A Social Planner increases welfare using rebate-based pricing. High-frequency traders strengthen exchange incentives for rebate-based pricing; a new explanation for widespread Maker-Taker and Taker-Maker pricing. With HFTs, rebate-based pricing improves total welfare, but Pareto transfers are needed to improve investor welfare. Sequential bargaining games between competing exchanges setting fees have pure-strategy equilibria.
We exploit the shift from frequent batch auctions to continuous trading at the Taiwan Stock Exchange to show that liquidity deteriorated in large-cap and efficiency significantly improved in mid-cap and small-cap after trading became continuous. Our results reveal that the migration to the continuous limit order book had heterogeneous effects across stocks. The lack of negative abnormal returns in large-cap for which both liquidity and marginally, efficiency declined, suggests investors value highly the opportunity to trade continuously. Continuous trading increased profits for fast investors that engage in liquidity provision while losses incurred by individual investors did not change significantly.