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Information flow in a fragmented dealer market: three essays on price discovery

Tuttle, Laura A.
http://rave.ohiolink.edu/etdc/view?acc_num=osu1089910638

Abstract Details

2004, Doctor of Philosophy, Ohio State University, Business Administration.
The 1990's were a period of rapid change in the trading of Nasdaq stocks. Advances in network technology improved the market's ability to trade efficiently and disseminate real-time information. Concurrently, regulatory changes mandated inclusion of alternate trading venues in the quote montage, and restricted the manner in which customer limit orders are handled by market makers. This dissertation explores the price formation process in the Nasdaq market, examining how fragmentation and imperfect transparency affects price formation. The first essay, “Price Discovery in Nasdaq Issues”, investigates price leadership relationships between Nasdaq market makers and Electronic Communications Networks (ECNs). Using the Hasbrouck information share and Gonzalo-Granger common factor methodologies, I show that ECNs provide more than half of the price discovery for approximately one out of three Nasdaq 100 stocks, although ECNs trades account for less than 33% of any Nasdaq 100 issue's trading activity. The second essay, “Hidden Orders, Trading Costs and Information”, explores non-displayed (reserve) depth in Nasdaq market-maker quotes in SuperSOES. While the presence of hidden depth at the inside has no effect on effective half-spreads, the information content of a trade (as measured by the midquote adjustment in the 30 minutes post-trade) is lower when reserve size is quoted, suggesting reserve size signals short-term price movements. Displayed depth does not predict daily returns, but the non-displayed orders of investment banks and wirehouses are indicative of daily price changes. In the final essay, “News or Noise: Is the Price Impact of Island Trades Persistent?”, I examine the trades on the Island ECN to discover whether their information impact is transient or permanent. I measure price impact at a number of horizons, allowing for the possibility of price reversals from liquidity motivated trades. Using simple regressions, I show Island trades are more informative than other trades only at short time horizons post-trade; at longer horizons, the price impact of an Island trade is not significantly different from trades in other venues. Island trades can be shown to be more informative at longer horizons only when the experimental design controls for the endogeneity of the trading venue decision.
Ingrid Werner (Advisor)
122 p.
Business Administration, General
market microstructure; price discovery; electronic communication network; ECN; hidden orders

Recommended Citations

Citations

  • Tuttle, L. A. (2004). Information flow in a fragmented dealer market: three essays on price discovery [Doctoral dissertation, Ohio State University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=osu1089910638

    APA Style (7th edition)

  • Tuttle, Laura. Information flow in a fragmented dealer market: three essays on price discovery. 2004. Ohio State University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=osu1089910638.

    MLA Style (8th edition)

  • Tuttle, Laura. "Information flow in a fragmented dealer market: three essays on price discovery." Doctoral dissertation, Ohio State University, 2004. http://rave.ohiolink.edu/etdc/view?acc_num=osu1089910638

    Chicago Manual of Style (17th edition)

osu1089910638
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© 2004, all rights reserved.
This open access ETD is published by The Ohio State University and OhioLINK.