Leibniz Institute for Financial Research SAFE

We document a pecking order of transaction costs in the interdealer market for German sovereign bonds, where three trading protocols coexist. Dealers can trade over the counter (OTC), either bilaterally or via brokers, as well as on an exchange. Trading on the exchange is more expensive than OTC, and broker-intermediated trades are more costly than bilateral OTC trades. The existence of an OTC discount is difficult to square with theories centered around search-and-bargaining frictions but is in line with models of hybrid markets based on information frictions. Consistently, we show that dealers’ information impacts their choice of trading protocol and that the pecking order of transaction costs is aligned with the informational content of order flows across protocols. Search and bargaining as well as information proxies explain differences in OTC discount within protocols. A realistic description of hybrid markets thus requires both types of frictions. This paper was accepted by Agostino Capponi, finance. Funding: L. Pelizzon and M. Schneider acknowledge funding by the Deutsche Forschungsgemeinschaft [Grant 329107530]. L. Pelizzon thanks the Leibniz Institute for Financial Research SAFE for financially sponsoring this research. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.00194 .

Abstract A novel spatial autoregressive model with time-varying structural variance for panels of time series data is introduced. It incorporates multilayer networks and accounts for dynamic relationships, thus enabling the analysis of shock propagation through time-varying spillover effects. The proposed method outperforms alternative spatial model benchmarks in an empirical application investigating the impact of cooperative and conflictual geopolitical relationships on G7 stock markets. The results indicate that cooperative interactions have a greater influence on stock markets than conflictual ones, highlighting the collaborative nature of the G7. They also reveal heterogeneous network exposures and distinct patterns of direct and indirect spillover effects.

We investigate how high-frequency trading (HFT) in equity markets affects options market liquidity. We find that increased aggressive HFT activity in the stock market leads to wider bid–ask spreads in the options market through two main channels. First, options market makers’ quotes are exposed to sniping risk from HFTs exploiting put–call parity violations. Second, informed trading in the options market further amplifies the impact of HFT in equity markets on the liquidity of options by simultaneously increasing the options bid–ask spread and intensifying aggressive HFT activity in the underlying market.