Stefano Alderighi , Senior Economist – Researcher , WFE | Dec 2016

 

Stefano Alderighi, Senior Economist – Researcher, WFE takes us through the important trends to emerge from a recent market microstructure conference.

The market ‘Microstructure Conference – Confronting Viewpoints’ (which took place in Paris from 6-9 December 2016) is a bi-annual event aimed at setting the frontier of the research debate on market microstructure topics. It mostly hosts academic presentations, although it welcomes the active participation of practitioners and private sector researchers.

The 2016 conference had a truly interdisciplinary character. Academic contributions were both theoretical and applied, and spanned many different fields: from financial economics to applied mathematics; from pure finance, to applied physics, presentations covered the whole universe of the current debate on market microstructure.

One focus of interest was the impact of high-frequency trading (HFT) on order placing and market behaviour. Professor Ryan Riordan (Queen’s University) provided evidence that in case of extreme price movements, high-frequency traders behave as liquidity suppliers and contribute to market stability, as opposed to the prevalent opinion. Professor Pamela Moulton (Cornell University) showed that HFT contributes towards reducing price inefficiencies after earnings announcements in typically low-attention moments (such as Friday afternoons).

Several contributions drew from physics to explain market behaviour. Professor Anna Obizhaeva (University of Maryland) and Doctor Felix Patzelt (Capital Fund Management) both applied physics principles to explain market microstructure. It is not by chance that several scholars presenting at the conference had a background in physics or applied mathematics, such as Professor Fabrizio Lillo (Scuola Normale Superiore di Pisa), whose research is focused (among other things) on the mathematical modelling of limit order books.

More ‘orthodox’ contributions in finance and financial economics weren’t lacking either. The presentation from Professor Brian Weller (Duke University) was remarkable; he has developed a novel, real-time measure of extreme event risk that allows the forecasting of extreme price movements with more advanced, higher precision than already existing measures (such as realised volatility). Fixed-income products and bond markets also proved to be an area of increasing interest. Professor Olivier Gueant (Paris 1), for example, proposed a novel theoretical framework to model the behaviour of dealers and clients in the corporate bond market.

On the first day, the conference featured a two-hour poster presentation session, that gave the opportunity to (generally) younger researchers to present their research in a more friendly and relaxed environment. The topics mirrored those of the contributed sessions: mathematical modelling of limit order books, and the effect of HFT on market behaviour were the most popular ones. Fields were again diverse: papers in applied mathematics were presented shoulder-to-shoulder to contributions in behavioural finance.

The conference also hosted two roundtables focused on broad topics (‘Foreseeing new fixed income markets’ and ‘Are buy-side the new liquidity providers?’) that saw the participation of practitioners and academics, and sketched the roadmap for future research- and profession-related questions.

To conclude, the conference successfully managed to provide a complete picture of the most relevant topics in market microstructure research. It combined diverse fields, and yet depicted a cohesive portrait of the current state of the art. Although mostly academic, it proved to be of great interest for practitioners in the private sector, and was even more research oriented and evidence driven than in the past.

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