The award-winning paper by the RSM researchers provides the first theoretical analysis of the impact on liquidity and market stability of the emergence of a new set of liquidity providers on financial markets: high-frequency traders (HFTs). In line with practice, HFTs differ most notably from traditional market participants in the fact that they combine speed and information processing.
Financial industry
The Josseph de la Vega Prize shows recognition by the financial industry, and that the RSM researchers’ theoretical ideas are accessible for a practitioners’ audience. In recent years, markets exhibit an increasing amount of mini-flash crashes, which is causing anxiety, says Dr Van Achter. “The advent of high-frequency trading is seen as a major driver, and is thus currently followed with great scrutiny by regulators, the media and the financial industry,” he said, adding that their analysis is the first to document the economic channel explaining why these crashes occur.
Market stability through technology
During the study, Van Achter and Bongaerts compare a setting with HFTs to settings with traders that only have speed technology or only information processing technology available. It is shown that the stand-alone implementation of either technology will only create very mild market stability distortions at most. Yet, when HFTs dominate the market for liquidity provision, markets are more liquid but feature occasional liquidity dry-ups. Building on this analysis, the authors propose new regulatory tools to prevent these sudden drops of liquidity.
Josseph de la Vega Prize
The Josseph de la Vega Prize of €5,000 was awarded by FESE President Deirdre Somers, CEO of the Irish Stock Exchange, and Michel Maquil, Chairman of the De la Vega Steering Committee, on 17 June 2015 at the Gala Dinner of the FESE Convention in Oslo. “It was highly stimulating to exchange ideas about the organisation of the financial industry with high-level exchange and regulatory officials,” said Dr Van Achter.
The De la Vega advisory jury consisted of a group of top researchers and business leaders from organisations such as Warwick University, IESEG-School of Management, Goldman Sachs, European Central Bank, Armenian National Postal Operator, Copenhagen Business School, University of Valencia, and Karlsruhe Institute of Technology.
The Federation of European Securities Exchanges (FESE)
The FESE represents 36 exchanges in equities, bonds, derivatives and commodities through 19 full members from 30 countries, as well as one affiliate member and one observer member. At the end of 2014, FESE members had up to 9,051 companies listed on their markets, of which seven per cent are foreign companies contributing towards the European integration and providing broad and liquid access to Europe’s capital markets. Through their regulated markets and multilateral trading facility operations, FESE members are keen to support the European Commission’s objective of creating a single market in capital markets. Annually, FESE invites researchers, academics, and practitioners to submit papers to the Josseph de la Vega Prize for an outstanding research paper related to the securities markets in Europe. www.fese.eu/de-la-vega-prize