The thesis is composed by three chapters. The first chapter, "Time Series Reversal: a payment cycle friction", introduces a novel aggregate reversal strategy that exploits monthly calendar effects. Specifically, I show that the end-of-the-month return of the S&P500 negatively correlates with one-month ahead returns. Contrary to the cross-sectional findings, strategies based on the novel aggregate pattern are extremely cost-effective, easy to implement, cyclical, and do not require short-selling. This novel pattern is consistent with pension funds’ liquidity trading to meet pension payment obligations. The second chapter, "Optimal Tick Size," proposes a model of a limit order book to determine the optimal tick size that maximizes the welfare of market participants. When investors arrive sequentially and supply liquidity by undercutting or queuing behind existing orders, the optimal tick size is a positive function of the asset value and a negative function of trading activity. We use the introduction of MiFID II to empirically show that the new tick size regime based on price and trading activity benefited market participants. Our results suggest that both the European tick size regime and (partially) the 2022 SEC proposal dominate Reg. NMS Rule 612. The last chapter, "Manipulation-Free Trading Mechanisms: Auction Design Approach,"proposes new financial market mechanisms through an auction design approach. We first introduce a simultaneous mechanism as an alternative to dark pools. This mechanism endogenously separates buyers from sellers by using the median price as the clearing outcome, thereby avoiding the transparency and manipulation issues inherent in traditional dark pools. Next, we study efficient mechanisms under information uncertainty and learning. We propose a sequential trading mechanism that progressively announces signals, effectively overcoming the issues of manipulation and speed races associated with standard Limit Order Books.
Essays on Liquidity & Market Rules
GRAZIANI, GIULIANO
2025
Abstract
The thesis is composed by three chapters. The first chapter, "Time Series Reversal: a payment cycle friction", introduces a novel aggregate reversal strategy that exploits monthly calendar effects. Specifically, I show that the end-of-the-month return of the S&P500 negatively correlates with one-month ahead returns. Contrary to the cross-sectional findings, strategies based on the novel aggregate pattern are extremely cost-effective, easy to implement, cyclical, and do not require short-selling. This novel pattern is consistent with pension funds’ liquidity trading to meet pension payment obligations. The second chapter, "Optimal Tick Size," proposes a model of a limit order book to determine the optimal tick size that maximizes the welfare of market participants. When investors arrive sequentially and supply liquidity by undercutting or queuing behind existing orders, the optimal tick size is a positive function of the asset value and a negative function of trading activity. We use the introduction of MiFID II to empirically show that the new tick size regime based on price and trading activity benefited market participants. Our results suggest that both the European tick size regime and (partially) the 2022 SEC proposal dominate Reg. NMS Rule 612. The last chapter, "Manipulation-Free Trading Mechanisms: Auction Design Approach,"proposes new financial market mechanisms through an auction design approach. We first introduce a simultaneous mechanism as an alternative to dark pools. This mechanism endogenously separates buyers from sellers by using the median price as the clearing outcome, thereby avoiding the transparency and manipulation issues inherent in traditional dark pools. Next, we study efficient mechanisms under information uncertainty and learning. We propose a sequential trading mechanism that progressively announces signals, effectively overcoming the issues of manipulation and speed races associated with standard Limit Order Books.File | Dimensione | Formato | |
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