MOINAS Sophie

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This thesis is composed of three separate chapters. Each of these chapters examines a specific impact of competition between exchanges on financial markets. Chapter 2 proposes a theoretical model to analyze the effect of competition on the certification role offered by exchanges. The results show that overestimating the quality of a project is an equilibrium despite the presence of reputation costs. Chapter 3 analyzes the effects of the organizational structure conversion phenomenon of mutual-to-quote exchanges on performance and market quality. The results suggest that, although this conversion improves the financial performance of the exchanges, it may nevertheless harm market quality. Chapter 4 is an empirical study of the impact of the pre-opening period on price discovery and liquidity formation in the primary market and on competing platforms. The results show that the indicative prices of the pre-opening period participate in price discovery and also contain information particularly at the beginning of the pre-opening.

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: We propose a simple classroom experiment on speculative bubbles: the Bubble Game. This game is useful to discuss about market efficiency and trading strategies in a financial economics course, and about behavioral aspects in a game theory course, at all levels. The Bubble Game can be played with any number of students, as long as this number is strictly greater than one. Students sequentially trade an asset which is publicly known to have a fundamental value of zero. If there is no cap on asset prices, speculative bubbles can arise at the Nash equilibrium because no trader is ever sure to be last in the market sequence. Otherwise, the Nash equilibrium involves no trade. Bubbles usually occur with or without a cap on prices. Traders who are less likely to be last and have less steps of reasoning to perform to reach equilibrium are in general more likely to speculate.

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High speed market connections improve investors׳ ability to search for attractive quotes in fragmented markets, raising gains from trade. They also enable fast traders to obtain information before slow traders, generating adverse selection, and thus negative externalities. When investing in fast trading technologies, institutions do not internalize these externalities. Accordingly, they overinvest in equilibrium. Completely banning fast trading is dominated by offering two types of markets: one accepting fast traders, the other banning them. Utilitarian welfare is maximized with (i) a single market type on which fast and slow traders coexist and (ii) Pigovian taxes on investment in the fast trading technology.

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.

In the first chapter, I show that traditional liquidity measures, such as market depth, are not always relevant for measuring investor welfare. I build a model of an order-driven market and show that high liquidity supply can correspond to poor execution conditions for liquidity providers and relatively low welfare.In the second chapter, I model the speed of price adjustments to news arrivals in order-driven markets, when investors have limited attention capacity.Due to their limited attention, investors imperfectly follow news arrivals. Due to their limited attention, investors imperfectly follow the arrival of news, so prices adjust to the news after a certain delay. This delay decreases as the level of attention of investors increases.The delay in price adjustment also decreases as the frequency at which news arrives, increases. The third chapter presents a work written in collaboration with Thierry Foucault. We build a model to explain how high-frequency trading can generate "mini-flash crashes" (a sudden change in price followed by a very rapid return to the previous level). Our theory is based on the idea that there is a tension between the speed at which information can be acquired and the accuracy of that information. When high-frequency traders implement strategies involving rapid reactions to market events, they increase their risk of reacting to noise and thus generate "mini flash crashes". Nevertheless, they increase the informational efficiency of the market.

We propose a bubble game that involves sequential trading of an asset commonly known to be valueless. Because no trader is ever sure to be last in the market sequence, the game allows for a bubble at the Nash equilibrium when there is no cap on the maximum price. We run experiments both with and without a price cap. Structural estimation of behavioral game theory models suggests that quantal responses and analogy-based expectations are important drivers of speculation.

The first chapter is motivated by three elements of bank panics, which in combination are still very poorly understood. The first element is the fact that information about the quality of banks' long-term investments is not perfect. The second is the fact that the quality of banks' investments can be correlated. The third element is the fact that depositors of one bank can observe when there is a run on another bank. This chapter extends the application of "global games" but to examine how these elements affect the deposit contract that banks offer to depositors and the ex ante probability of sequential bank panics. While noting the attention paid to the facts that the quality of banks' investments is not perfect and that this quality may be correlated, the second chapter focuses on the interbank market. This chapter also extends the application of "global games" to examine, this time, how these three new elements affect the deposit contract that banks offer and the ex ante probability of bank panics. The third chapter presents a dynamic rational expectations model to explain the volatility observed in emerging market risk premia. This model is based on the assumption that agents regularly receive new information about the country's ability to repay its sovereign debt. We then empirically study the original predictions of the theoretical model, using monthly data for emerging markets over the period 1994-2006.

The objective of this thesis is to study the daily and weekly options on the Dutch market index AEX recently introduced by NYSE Euronext. We consider them along three main lines: first, the impact of their introduction on the volumes of existing longer-dated options. Second, we analyze the different types of investors who trade these options by distinguishing between market members, their customers and market makers. Finally, given the level of information and sophistication of investors who trade short-dated options, we examine the impacts of their trading on the volatility of the underlying market, the volatility of the AEX market index. Our main results reveal a substitution effect of new options for existing monthly options. We find a negative impact of daily and weekly options on monthly option volumes and a negative impact of the introduction of daily options on weekly option volumes. As for investors, we find that daily and weekly options are mainly traded by the clients of market members who turn out to be uninformed and unsophisticated. Regarding the impact of the new options on the market volatility of the underlying assets, we conclude that the level of volatility of the AEX index has increased following the introduction of daily and weekly options due to the fact that these new options are mainly traded by clients, who are uninformed investors.

The thesis is part of the "microstructure of financial markets" framework. Its objective is to study the impact of market organization on the supply of liquidity to market participants, and thus on market performance. The first test focuses on the quoting strategies of market makers in multiple markets. We consider two risk-averse market makers competing for order flow on two markets simultaneously. We show that the coexistence of an alternative trading system influences the market makers' reserve prices, which take into account the possibility that their quotes are affected either on the same or on opposite sides of the two markets. Moreover, unlike the traditional paradigm, the market maker with the most extreme position does not always place the best price. Our results thus suggest several empirical predictions about the interactions between liquidity bids in multiple markets. They also allow us to study the impact of several reforms on market performance. In particular, we show that requiring market makers to place identical quotes in multiple systems increases the ranges of best prices quoted in the dominant market. The second essay focuses on liquidity supply strategies in an anonymous order-driven market and a non-anonymous market. The model is based on the idea that some limit order placers have privileged information about the size of future price changes. We show that the move to anonymity affects market liquidity and the information content of the order book. In light of these results, we study the switch to anonymity on the Paris stock exchange, which took place on April 23, 2001. We first find that the order book contains information about future volatility, which corroborates our postulate. We then show that the change in transparency significantly reduced not only the price ranges, but also the information content of the order book, consistent with the predictions of the theoretical model. In the final essay, we study liquidity supply strategies in an opaque order-driven market that allows hidden limit orders, and in a transparent market that does not. The model is based on the idea that some limit order placers possess private information about the long-run value of the asset. Since the order book partially reveals this information, which decreases the likelihood of execution of informed orders, an informed liquidity provider can use these hidden orders not to mitigate the impact of his order. The model allows us to suggest new empirical predictions. Furthermore, we find that allowing hidden orders improves efficiency. On the other hand, counter-intuitively, it increases the transaction costs of liquidity seekers, and may decrease the expected profits of an informed liquidity provider.