Resiliency: Cross-Venue Dynamics with Hawkes Processes

63 Pages Posted: 16 Oct 2020

See all articles by Loriana Pelizzon

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice

Satchit Sagade

Goethe University Frankfurt - Department of Finance; Leibniz Institute for Financial Research SAFE

Katia Vozian

Hanken School of Economics - Helsinki Graduate School of Economics

Date Written: September 16, 2020

Abstract

Market fragmentation and technological advances increasing the speed of trading altered the functioning and stability of global equity limit order markets. Taking market resiliency as an indicator of market quality, we investigate how resilient are trading venues in a high-frequency environment with cross-venue fragmented order flow. Employing a Hawkes process methodology on high-frequency data for FTSE 100 stocks on LSE, a traditional exchange, and on Chi-X, an alternative venue, we find that when liquidity becomes scarce Chi-X is a less resilient venue than LSE with variations existing across stocks and time. In comparison with LSE, Chi-X has more, longer, and severer liquidity shocks. Whereas the vast majority of liquidity droughts on both venues disappear within less than one minute, the recovery is not lasting, as liquidity shocks spiral over the time dimension. Over half of the shocks on both venues are caused by spiralling. Liquidity shocks tend to spiral more on Chi-X than on LSE for large stocks suggesting that the liquidity supply on Chi-X is thinner than on LSE. Finally, a significant amount of liquidity shocks spill over cross-venue providing supporting evidence for the competition for order flow between LSE and Chi-X.

Keywords: liquidity, resiliency, fragmentation, competition, high-frequency data, Hawkes processes

JEL Classification: G10, G14

Suggested Citation

Pelizzon, Loriana and Pelizzon, Loriana and Sagade, Satchit and Vozian, Katia, Resiliency: Cross-Venue Dynamics with Hawkes Processes (September 16, 2020). SAFE Working Paper No. 291, Available at SSRN: https://ssrn.com/abstract=3711976 or http://dx.doi.org/10.2139/ssrn.3711976

Loriana Pelizzon (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Satchit Sagade

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany
+49 69 798 30085 (Phone)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 30085 (Phone)

Katia Vozian

Hanken School of Economics - Helsinki Graduate School of Economics

Helsinki
Finland

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