Division of Banking & Finance
Nanyang Business School
Nanyang Technological University
Email: xin.wang [AT] ntu.edu.sg
Address: S3-B1B-60, 50 Nanyang Ave, Singapore 639798
Research Interests: Market Microstructure, Financial Intermediation, Macro-Finance and FinTech
Curriculum Vitae (November 2018)
- Why Do Stock Exchanges Compete on Speed, and How? | PDF
EFA 2018, Finance Down Under 2018, 16th Annual International Industrial Organization Conference
Abstract: This paper shows that a key driver of stock exchanges' competition on order-processing speeds is the Order Protection Rule, which requires an exchange to route its customers' orders to other exchanges with better prices. Faster exchanges attract more price-improving limit orders because the probability of being bypassed by trades with inferior prices on other exchanges is reduced. When all exchanges speed up, this probability can increase, potentially harming the welfare of investors. In contrast, increasing connection speeds between exchanges raises investor welfare by reducing this probability. Nevertheless, no exchange wants to improve connection speeds because this will reduce its trading volume. I provide empirical evidence showing that slow exchanges lose trading volume to fast exchanges as the latter attract more price-improving orders. I first show that a slow exchange's (IEX) market share of trading volume in stocks with a five-cent tick, the minimum price movement, increases by 13 percent relative to one-cent tick stocks after the introduction of Tick Size Pilot Program in 2016, because price improving is less likely with larger tick size. I then show that after switching from a dark pool to a public exchange, IEX attracts more trading volume in stocks that are more likely to have one tick bid-ask spread as price improving is impossible with binding spread.
Revise and Resubmit to the Journal of Financial Economics
2nd SAFE Market Microstructure Conference (Goethe University Frankfurt), 2018 Stern Microstructure Conference, 11th Financial Risks International Forum (Paris), 2018 NTU Finance Conference, 2018 Front Range Finance Seminar*, UCLA Anderson*, Telfer Annual Conference on Accounting and Finance 2018*, University of Florida*, University of Rochester*, Carlson Junior Conference at the University of Minnesota*, Wabash River Conference at the Indiana University*, Smokey Mountain Conference* (* indicates presentation by co-author)
Abstract: We incorporate discrete tick size and allow non-high-frequency traders (non-HFTs) to supply liquidity in the framework of Budish, Cramton, and Shin (2015). When adverse selection risk is low or tick size is large, the bid-ask spread is typically below one tick, and HFTs dominate liquidity supply. In other situations, non-HFTs dominate liquidity supply by undercutting HFTs, because supplying liquidity to HFTs is always less costly than demanding liquidity from HFTs. A small tick size improves liquidity, but also leads to more mini-flash crashes. The cancellation-to-trade ratio, a popular proxy for HFTs, can have a negative correlation with HFTs’ activity.
- Can Stock Exchanges with 'Speed Bump' Designs Survive?
Abstract: To reduce high-frequency trader’s speed advantage, new stock exchange designs such as frequent batch auctions and several order delay designs have been proposed to slow down trading speed and eliminate the speed arms race among high-frequency traders. In this paper, I investigate how newly designed exchanges with these ‘speed bump’ features would compete against traditional exchanges. I find that among order delay proposals, the most effective design is to delay only liquidity taking orders as proposed by the Chicago Stock Exchange. Frequent batch auctions are shown not to improve liquidity when the degree of private information is high enough. Moreover, when frequent batch auctions are implemented, exchanges have incentives to compete on the frequency at which batch auctions take place. Finally, I show that even when sniping is a significant problem for some stocks, exchanges with large market share of total trading volume may lack incentives to implement frequent batch auctions or order delays even when these innovative designs could improve long-term investor welfare. Therefore, the interests of exchanges may not be aligned with those of long-term investors with regard to how they value designs that alleviate sniping.
Work in Progress
- Would Mandated Pre-Trade Price Transparency Improve Liquidity in Corporate Bond Markets? with Dan Bernhardt
- Can Stock Exchanges be Allowed to Choose Their Tick Size? With Mao Ye
- Are Stock Markets Rigged from Slow National Best Bid and Offer Price? With Dan Bernhardt and Yashar Barardehi
- Financial Economics (Investments) at the University of Illinois at Urbana-Champaign Fall 2015-Spring 2017