LESCOURRET Laurence

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Technological and regulatory developments have favored the rise of two major phenomena associated with greater opacity: high frequency trading (HFT) and dark pools. One out of every two transactions is now made by HFT. Dark pools attract 10% of trading volume in Europe and 20% in the United States, notably because of the high frequency traders targeting uninformed orders that are exchanged there. Academic studies show that transaction costs have never been so low under the competitive pressure of HFT. However, they have been stable since 2009 even as speed continues to increase. Market efficiency has improved thanks to the arbitrage activity of THF. However, as trading volume shifts to dark pools, the risk of a deterioration in liquidity and efficiency increases. Add to this the risk of competitive distortion and operational and technological risk, and regulators are faced with increasingly complex issues.

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Financial markets are increasingly fragmented. How to supply liquidity in this environment? Using an inventory model, we analyze how two strategic intermediaries compete across two venues that can be hit simultaneously by liquidity shocks of equal or opposite signs. Although order flow is fragmented ex-ante, we show that intermediaries might strategically consolidate it ex-post, improving global liquidity. We also find that local spreads co-move together across venues as a result of global inventory management. Using Euronext proprietary data, we uncover new evidence of inventory control across venues and find that local spreads vary in a way uniquely predicted by the model.

Market fragmentation and technology have given rise to new trading strategies. One of them is to supply liquidity simultaneously across multiple trading venues, which requires multi-venue management of inventory risk. We build an inventory model in which order ow fragments across two venues, and show that multi-venue market-makers might consolidate the fragmented order ow, leading to lower transaction costs. We also show that multi-venue market-making strategies result in interrelated spreads. We empirically investigate the main predictions of our model using Euronext proprietary data that contain member's orders and trades identities for multi-listed firms. We find evidence of cross-venue inventory control, in particular for formally registered market-makers. We also find that bid-ask spreads vary with inventories of multi-venue market-makers and the way order ow fragments across all venues, as uniquely predicted by our model.

The purpose of this thesis is to contribute to a better analysis of the impact of market practices on competition between market participants. The first essay focuses on the practice of private information exchange. We consider a market in which brokers have access to (i) 'fundamental' information on the net asset value of the risky asset and (ii) non-fundamental information on the volume of orders placed by uninformed investors. We show, in the framework of the Kyle (1985) model, that it can be profitable for two differently informed brokers to share information. Information sharing has an ambiguous impact on liquidity, but it increases informational efficiency and price stability. It also reduces transaction costs, suggesting a beneficial impact of this practice on market performance. The second essay analyzes how the practice of preferencing affects the quoting strategies of two risk-averse market makers. Preferencing allows a market maker - the so-called 'preferred' market maker - to execute orders exclusively, outside the central market. Regardless of the market structure (centralized or fragmented), we show that this practice reduces the incentives of market makers to quote competitive prices. It therefore leads to an increase in the price ranges and profits of market makers. However, the position risk involved in preferencing can generate losses for the executing market maker. In the third test, we show that the preferred market maker may therefore find it profitable to communicate the status of his preferred order flow to his competitor when he is not observing it. The communication helps to steer the posted prices in a direction that favors loss reduction. Using pre-opening data from the Nasdaq, we find that the market makers known to be the most favored (the "wholesalers") are among those who participate the most in the communication game between market makers. However, wholesalers' signals contribute the least to daily price discovery and are concentrated in stocks that are strongly linked to preferencing. Moreover, at the Nasdaq opening, we find that wholesaler prices and best market prices have a significant transitory component, supporting the idea of position risk communication.