We examine the dynamics and the drivers of market liquidity during the financial crisis, using a unique volume-weighted spread measure. According to the literature we find that market liquidity is ...impaired when stock markets decline, implying a positive relation between market and liquidity risk. Moreover, this relationship is the stronger the deeper one digs into the order book. Even more interestingly, this paper sheds further light on so far puzzling features of market liquidity: liquidity commonality and flight-to-quality. We show that liquidity commonality varies over time, increases during market downturns, peaks at major crisis events and becomes weaker the deeper we look into the limit order book. Consistent with recent theoretical models that argue for a spiral effect between the financial sector’s funding liquidity and an asset’s market liquidity, we find that funding liquidity tightness induces an increase in liquidity commonality which then leads to market-wide liquidity dry-ups. Therefore our findings corroborate the view that market liquidity can be a driving force for financial contagion. Finally, we show that there is a positive relationship between credit risk and liquidity risk, i.e., there is a spread between liquidity costs of high and low credit quality stocks, and that in times of increased market uncertainty the impact of credit risk on liquidity risk intensifies. This corroborates the existence of a flight-to-quality or flight-to-liquidity phenomenon also on the stock markets.
We examine the dynamics and the drivers of market liquidity during the financial crisis, using a unique volume-weighted spread measure. According to the literature we find that market liquidity is ...impaired when stock markets decline, implying a positive relation between market and liquidity risk. Moreover, this relationship is the stronger the deeper one digs into the order book. Even more interestingly, this paper sheds further light on so far puzzling features of market liquidity: liquidity commonality and flight-to-quality. We show that liquidity commonality varies over time, increases during market downturns, peaks at major crisis events and becomes weaker the deeper we look into the limit order book. Consistent with recent theoretical models that argue for a spiral effect between the financial sector’s funding liquidity and an asset’s market liquidity, we find that funding liquidity tightness induces an increase in liquidity commonality which then leads to market-wide liquidity dry-ups. Therefore our findings corroborate the view that market liquidity can be a driving force for financial contagion. Finally, we show that there is a positive relationship between credit risk and liquidity risk, i.e., there is a spread between liquidity costs of high and low credit quality stocks, and that in times of increased market uncertainty the impact of credit risk on liquidity risk intensifies. This corroborates the existence of a flight-to-quality or flight-to-liquidity phenomenon also on the stock markets.
Since launching in 1997, the name Xetra has become synonymous with the electronic trading of securities – not just in German blue chips and other equities, but also in ETFs where it is a pioneer and ...the leading European trading venue. This article takes a look back at the history of Xetra and electronic trading in general, from 1997 to the present day. Alongside detailing key developments in Xetra’s history – for example, the launch of ETF trading in 2000 and responses to regulatory changes such as MiFID in 2007 – the article also examines the market models followed by Xetra and the protective mechanisms in place to ensure the security of electronic markets. Finally, the article concludes with a brief discussion of Xetra’s 2017 move to the state-of-the-art T7 trading infrastructure. As well as improving latency and throughput, the move to T7 brought Xetra into line with Eurex Exchange and thus greatly simplified access for members trading on both platforms.
Computerized trading controlled by algorithms - "Algorithmic Trading" - has become a fashionable term in investment banking. We investigate a set of Xetra order data to find traces of algorithmic ...trading by studying the lifetimes of cancelled orders. Even though it is widely agreed that an algorithm must randomize its order activities to avoid exploitation by other traders, we still find systematic patterns in the submission and cancellation of certain Xetra orders, indicating the activity of algorithmic trading. The trading patterns observed might be interpreted as fishing for profitable roundtrips.
The changes in the volatility and liquidity of French stocks are examined before and after their cross-listing on the German electronic market, the Xetra. The results are mixed in terms of the change ...in liquidity and volatility of stocks after cross-listing. It is found that for many stocks volatility of stock prices increases and liquidity declines after cross-listing. Furthermore, similar results are obtained when market volatility in the Paris Bourse is controlled for. These results suggest the migration of orders to the Xetra and the deterioration of the quality of the Paris Bourse with the cross listing of French stocks on the German market, especially for those stocks that are continuously traded on the Xetra. These results seem to be against the integration of the French and German markets during the period analysed in this study. Furthermore, the findings indicate that the trading scheme and the characteristics of the stock should be considered in examining the cross-listing effects.
PDF
