2017
Clapham, B.; Gomber, P.; Lausen, J.; Panz, S. (2017)
Liquidity Provider Incentives in Fragmented Securities Markets
In: 24th Annual Meeting of the German Finance Association (DGF 2017, forthcoming); Ulm, Germany
Category: Proceedings [Find it]
AbstractWe study the introduction of single-market liquidity provider incentives in fragmented securities markets. Specifically, we analyze the Xetra Liquidity Provider Program at Deutsche Boerse from two perspectives: First, we investigate whether fee-rebates for liquidity providers enhance liquidity on the specific venue thereby increasing its competitiveness and market share. Second, we analyze whether single-market liquidity provider incentives increase overall market liquidity available for market participants in a fragmented market. For this purpose, we consolidate high-frequency order book information of the most relevant lit venues and measure the specific liquidity contribution of individual markets to the aggregate liquidity in the fragmented market environment. Our empirical results show that single-market liquidity provider incentives in fragmented markets result in increased liquidity on the respective market, a higher contribution of that market to consolidated liquidity and gains in market share in terms of trading volume. However, we find no significant effect for turnover and liquidity of the fragmented market as a whole but a redistribution to the venue offering the incentives.
Reference No.: 2017-149
Janze, C. (2017)
Are Cryptocurrencies Criminals Best Friends? Examining the Co-Evolution of Bitcoin and Darknet Markets
In: Proceedings of the 23rd Americas Conference on Information Systems (AMCIS 2017); Boston, USA
Category: Proceedings [Find it]
AbstractWhile public and private entities question the utility of privacy preserving means of electronic payments for individuals other than criminals, discussions are primarily based on anecdotal evidence. Thus, we address the overall research question of whether pseudonymous cryptocurrencies are primarily used by criminals. Based on Rational Choice Theory and darknet market design, we build a dynamic research model. Utilizing panel data of 296,875 unique product and service listings that were available on 19 darknet markets from June 2014 to July 2015 as well as Bitcoin blockchain transactions, we provide evidence for the co-evolution of Bitcoin and darknet markets. We find that transactions within the Bitcoin blockchain and the usage of transaction obfuscation services can be related to previous sales on darknet markets. The temporal lag can be attributed to escrow mechanisms. We contribute to the research stream of cryptocurrency usage behavior and discussions of regulators, governments and financial services firms.
Reference No.: 2017-147
Janze, C.; Risius, M. (2017)
Automatic Detection of Fake News on Social Media Platforms
In: Proceedings of the 21st Pacific Asia Conference on Information Systems (PACIS 2017, winner of the Best Paper Award); Langkawi, Malaysia
Category: Proceedings
Reference No.: 2017-143
Haferkorn, M. (2017)
High-Frequency Trading and its Role in Fragmented Markets
In: Journal of Information Technology, Vol. 32, No. 3, pp. 283-296
Category: Publications in scientific journals [Find it]
AbstractSecurities trading underwent a major transformation within the last decade. This transformation was mainly driven by the regulatory induced fragmentation and by the increase of high-frequency trading (HFT). On the basis of the electronic market hypothesis, which poses that coordination costs decline when markets become automated, and the efficient market hypothesis in its semi-strong form, we study the effect of HFT on market efficiency in the European fragmented market landscape. In doing so, we further incorporate the realm of financialization, which criticizes the increase in transaction speed. By conducting a long-term analysis of CAC 40 securities, we find that HFT increases market efficiency by leveling midpoints between Euronext Paris and Bats Chi-X Europe. On the basis of a cross-country event study, we analyze the effect of the German HFT Act. We observe that the midpoint dispersion of blue chip securities between the two leading venues Deutsche Boerse and Bats Chi-X Europe increased. We conclude that HFT increases market efficiency in the European market landscape by transmitting information between distant markets.
Reference No.: 2017-141
Glaser, F.; Panz, S. (2017)
(Pro?)-Cyclicality of Collateral Haircuts and Systemic Illiquidity
In: 21st Annual European Conference of the Financial Management Association International (FMA Europe 2017); Lisbon, Portugal
Category: Proceedings
AbstractProcyclicality of collateral haircuts and margins has become a widely proclaimed behavior and is currently discussed not only by academic literature but also by regulatory authorities in Europe. Procyclicality of haircuts is assumed to be a trigger of liquidity spirals due to its tightening effect of collateral portfolio values in times of market distress. However, empirical evidence on this topic is quite sparse and the discussions are primarily driven by insights derived from theoretical models. Nonetheless, oversight bodies are discussing macroprudential haircut add-ons in order to curb with the potential effects of procyclicality in distressed periods.
Based on a unique data set provided by a large European Central Counterparty we construct a measure of systemic illiquidity of bond collateral and analyze the relationship between haircuts, the development of periods with explosive price behavior and systemic illiquidity. We estimate the noise of bond yields to measure systemic illiquidity with and without considering haircuts. We then apply an explosive roots bubble detection technique to identify irrational periods in each of these two time series and to a combination of both. Finally, we propose a quantitative trigger design for macroprudential haircut add-ons. Our results confirm that (1) bond collateral markets face irrational, i.e. bubble-like illiquidity during periods of systemic distress. The results indicate that (2) haircuts are not amplifying or increasing with systemic illiquidity. (3) The proposed haircut add-on mechanism exhibits desirable features to mitigate systemic illiquidity during lasting periods of distress.
Reference No.: 2017-138
Janze, C. (2017)
Intruder Alert? How Stock Markets React to Potential IT Security Breaches: The Case of OpenSSL Heartbleed
In: Proceedings of the 30th Bled eConference; Bled; Slovenia
Category: Proceedings [Find it]
AbstractThis exploratory study investigates how potential information technology security breaches affect stock prices. Previous research indicates that stock markets tend to punish firms that experience unsolicited disclosure of information and proprietary data. However, little research exists on the question of whether firms are punished for creating the mere potential for data theft. Based on the information boundary theory, we design our exploratory research model. Subsequently, we utilize a sample of 4,147 stocks of firms headquartered in 43 countries to conduct multiple event studies. We reveal a delayed adverse stock market response to potential IT security breaches as well as a discrimination among firms operating in different industries. Consequently, this work enhances the understanding of the full economic impact of information security measures by shedding light on previously neglected hidden costs.
Reference No.: 2017-135
Clapham, B.; Gomber, P.; Panz, S. (2017)
Coordination of Circuit Breakers? Volume Migration and Volatility Spillover in Fragmented Markets
In: CEPR-Imperial-Plato Inaugural Market Innovator (MI3) Conference on the Evolving Market Structure in Europe and Beyond; London, UK
Category: Proceedings [Find it]
AbstractWe study circuit breakers in a fragmented, multi-market environment and investigate whether a coordination of circuit breakers is necessary to ensure their effectiveness. In doing so, we analyze 2,337 volatility interruptions on Deutsche Boerse and research whether a volume migration and an accompanying volatility spillover to alternative venues that continue trading can be observed. Different to prevailing theoretical rationale, trading volume on alternative venues significantly decreases during circuit breakers on the main market and we do not find any evidence for volatility spillover. Moreover, we show that the market share of the main market increases sharply during a circuit breaker. Surprisingly, this is amplified with increasing levels of fragmentation. We identify high-frequency trading as a major reason for the vanishing trading activity on the alternative venues and give empirical evidence that a coordination of circuit breakers is not essential for their effectiveness as long as market participants shift to the dominant venue during market stress.
Reference No.: 2017-134
Janze, C. (2017)
Design of a Decentralized Peer-to-Peer Reviewing and Publishing Market
In: Proceedings of the 25th European Conference on Information Systems (ECIS 2017); Guimaraes, Portugal
Category: Proceedings [Find it]
AbstractThis normative paper conceptualizes an alternative for the current scientific peer reviewing and publication system. Based on design science research methodology, we propose a distributed peer-to-peer network and transactional data base system (APOLLO) and a cryptocurrency (APL). We conceptualize a market for peer-to-peer reviewing and publishing of research contributions and associated assets that is based on economic market mechanisms and does not require centralized authorities or intermediaries. We discuss how the resulting decentralized and pseudonymous market for research assets could help to mitigate unresolved conflicts of interests and biases prevalent in the current system.
Reference No.: 2017-129
Janze, C. (2017)
Towards a Decentralized Information Systems Success Model
In: Proceedings of the 17th Conference of the Portuguese Chapter of the Association of Information Systems (CAPSI 2017); Guimaraes, Portugal
Category: Proceedings [Find it]
AbstractThis paper conceptualizes the decentralized information systems success model. Based on theoretical and empirical findings in the realm of Information Systems (IS) and Open Source Software (OSS) acceptance and success research as well as various IS enabled socio-economical trends, we define ten constructs (societal norms, economic boundaries, intention to contribute, intention to use, objective quality, heuristic/perceived quality, level of contribution, level of usage, intellectual net benefit and economic net benefit) as well as their relationships. To enhance the understanding of the proposed constructs and relationships, we give examples of the contribution to and the usage of cryptocurrencies. We contribute to the IS research stream of IS acceptance and success by providing a model that allows for an effective examination of decentralized IS success.
Reference No.: 2017-128
Janze, C. (2017)
Shedding Light on the Role of Sample Sizes and Splitting Proportions in Out-of-Sample Tests: A Monte Carlo Cross-Validation Approach
In: Proceedings of the 17th Conference of the Portuguese Chapter of the Association of Information Systems (CAPSI 2017); Guimaraes, Portugal
Category: Proceedings [Find it]
AbstractWe examine whether the popular 2/3 rule-of-thumb splitting criterion used in out-of-sample evaluation of predictive econometric and machine learning models makes sense. We conduct simulations regarding the predictive performance of the logistic regression and decision tree algorithm when considering varying splitting points as well as sample sizes. Our non-exhaustive repeated random sub-sampling simulation approach known as Monte Carlo cross-validation indicates that while the 2/3 rule-of-thumb works, there is a spectrum of different splitting proportions that yield equally compelling results. Furthermore, our results indicate that the size of the complete sample has little impact on the applicability of the 2/3 rule-of-thumb. However, our analysis reveals that when considering relatively small and relatively large training samples in relation to the sample size, the variation of the predictive accuracy can lead to misleading results. Our results are especially important for IS researchers considering the usage of out-of-sample methods for evaluating their predictive models.
Reference No.: 2017-127
Koch, J. (2017)
A Framework for the Notion of 'Utility' in the Landscape of Crowdfunding
In: Proceedings of the 25th European Conference on Information Systems (ECIS 2017); Guimaraes, Portugal
Category: Proceedings [Find it]
AbstractCrowdfunding, peer-to-peer lending, and crowdinvesting are part of the philosophy of 'openness' in information systems and constitute valuable opportunities for raising funds for business ideas and any type of project. Research has confirmed that online crowdfunding generates high value for project initiators that look for financial resources. Funders, for their part, benefit from funding compensations which they receive in exchange for their financial support. And, finally, diverse other groups of individuals are directly or indirectly influenced by the project results. As a consequence, research articles often touch aspects of utility regarding the individuals concerned. In fact, the notion of utility is of special importance in the context of crowdfunding because it constitutes the basis for explaining participants' actions and decisions. However, crowdfunding research does not use a consistent concept of 'utility', discusses aspects of utility only superficially, and ignores the various influences on utility generation processes in the landscape of crowdfunding. For this reason, we propose a consistent conceptualization of utility in the area of crowdfunding that regards the different sources of utility. We discuss the influences on funders' decision making and demonstrate that aspects of imperfect openness affect utility generating processes in crowdfunding in many ways.
Reference No.: 2017-118
Clapham, B.; Gomber, P.; Haferkorn, M.; Panz, S. (2017)
Managing Excess Volatility: Design and Effectiveness of Circuit Breakers
In: 34th International Conference of the French Finance Association (AFFI 2017); Valence, France
Category: Proceedings [Find it]
AbstractWe investigate different designs of circuit breakers implemented on European trading venues and examine their effectiveness to manage excess volatility and to preserve liquidity. Specifically, we empirically analyze volatility and liquidity around volatility interruptions implemented on the German and Spanish stock market which differ regarding specific design parameters. We find that volatility interruptions in general significantly decrease volatility in the post interruption phase. Unfortunately, this decrease in volatility comes at the cost of decreased liquidity. Regarding design parameters, we find tighter price ranges and shorter durations to support volatility interruptions in achieving their goals.
Reference No.: 2017-117
Lewandowska, O.; Glaser, F. (2017)
The Recent Crises and Central Counterparty Risk Practices in the Light of Procyclicality: Empirical Evidence
In: Journal of Financial Market Infrastructures, Vol. 5, No. 3, pp. 1-24
Category: Publications in scientific journals [Find it]
AbstractThe mandatory central clearing for standardized over-the-counter derivatives, which was introduced by recent financial market reforms, makes central counterparties (CCPs) the most systemically important market participants. However, the theory suggests that, aside from their potential to reduce systemic risk, CCP risk management practices such as margining and collateral haircuts may exacerbate financialcycle fluctuations. Based on almost ten years of empirical data from a leading clearing house, we investigate if and to what extent the procyclical effects suggested by the literature can be statistically confirmed. Our results for the period encompassing the credit crisis and European sovereign debt crisis do not confirm the hypothesis from theoretical research that CCP risk practices are procyclical. Instead, they reveal only a low average level of conditional correlation between market stress and the margin/haircut requirement in the investigated period. Moreover, increases in CCP haircuts do not make clearing members (CMs) systematically drop the bonds with increased haircuts from their portfolios. Our results indicate that the effectiveness of regulatory action in the form of macroprudential haircut add-ons is doubtful, as the systematic overcollateralization of open positions by CMs, as observed in our data set, may already act as a countercyclical break.
Reference No.: 2017-116
Glaser, F.; Risius, M. (2017)
The Side Effects of Scrutinising Traders in Social Trading Platforms
In: LSE Business Review
Category: Miscellaneous [Find it]
Reference No.: 2017-109
Clapham, B.; Haferkorn, M.; Zimmermann, K. (2017)
Does Speed Matter? The Role of High-Frequency Trading for Order Book Resiliency
In: 20th Annual Conference of the Swiss Society for Financial Market Research (SGF 2017); Zurich, Switzerland
Category: Proceedings [Find it]
AbstractThis paper explores limit order book resiliency following liquidity shocks in the presence of high-frequency trading firms. Based on a unique data set that enables the identification of orders submitted by algorithmic traders and subscribers of co-location services, we study whether high-frequency traders are involved in the reconstruction of the order book. We analyze order submission and deletion activity before and after a liquidity shock initiated by a large market order. Our results show that exclusively high-frequency traders reduce the spread within the first seconds after the market impact making use of their speed advantage. However, liquidity recovery in terms of order book depth takes significantly longer and is accomplished by human traders' submission activity only.
Reference No.: 2017-106
Escobar, M.; Mahlstedt, M.; Panz, S.; Zagst, R. (2017)
Vulnerable Exotic Derivatives
In: The Journal of Derivatives, Vol. 24, No. 3, pp. 84-102
Category: Publications in scientific journals [Find it]
AbstractIn this article, we study the impact of unilateral and bilateral counterparty risk on exotic derivatives. The default risk of a counterparty on over-the-counter transactions has gained relevance worldwide, particularly after the subprime and financial crisis with the default of Lehman Brothers. Since the early work of Black and Cox [1976], the default risk of a corporation is known to be representable as a barrier-type product with a sound financial footing involving assets and liabilities. Here, we present closed-form mathematical solutions for
exotic products in the framework of n assets under unilateral and bilateral counterparty risks, such as vulnerable barrier options, vulnerable spread options, and defaultable swaps. The findings show that, in realistic situations, price changes could be up to 20%, owing to unilateral and/or bilateral risks on exotic products.
Reference No.: 2017-103
Gomber, P.; Koch, J.; Siering, M. (2017)
Digital Finance and FinTech: Current Research and Future Research Directions
In: Journal of Business Economics, Vol. 87, No. 5, pp. 537-580
Category: Publications in scientific journals [Find it]
AbstractSince decades, the financial industry has experienced a continuous evolution in service delivery due to digitalization. This evolution is characterized by expanded connectivity and enhanced speed of information processing both at the customer interface and in back-office processes. Recently, there has been a shift in the focus of digitalization from improving the delivery of traditional tasks to introducing fundamentally new business opportunities and models for financial service companies. Digital Finance encompasses a magnitude of new financial products, financial businesses, finance-related software, and novel forms of customer communication and interaction - delivered by FinTech companies and innovative financial service providers. Against this backdrop, the research on finance and information systems has started to analyze these changes and the impact of digital progress on the financial sector. Therefore, this article reviews the current state of research in Digital Finance that deals with these novel and innovative business functions. Moreover, it gives an outlook on potential future research directions. As a conceptual basis for reviewing this field, the Digital Finance Cube, which embraces three key dimensions of Digital Finance and FinTech, i.e., the respective business functions, the technologies and technological concepts applied as well as the institutions concerned, is introduced. This conceptualization supports researchers and practitioners when orientating in the field of Digital Finance, allows for the arrangement of academic research relatively to each other, and enables for the revelation of the gaps in research.
Reference No.: 2017-102
Francioni, R.; Gomber, P. (2017)
High Frequency Trading: Market Structure Matters
In: Equity Markets in Transition, Eds.: R. Francioni and R. Schwartz, pp. 363-390; Springer International Publishing
Category: Chapter in book [Find it]
AbstractAlthough both media and the public seem to discuss the perceived dangers and threats of electronic trading only since the US flash crash in 2010, in reality, the shift towards electronic trading has been a long-lasting evolution. Often, the starting point of electronic trading is said to be the year 1971, when the National Association of Securities Dealers Automated Quotation (Nasdaq) became the first electronic stock market displaying quotes for 2500 over-the-counter securities. A significant migration process from over-the-counter and traditional floor trading to fully electronic markets took place on both sides of the Atlantic between the late 1970s and the mid-1990s. Starting from the electronification of major international exchanges, significant technological innovations emerged that successively walked up the value chain and led to a far-reaching automation of trading processes; first at Sell Side institutions and in a next step by their customers, i.e., Buy Side firms.
Reference No.: 2017-1
Glaser, F.; Panz, S. (2017)
Cyclicality of Collateral Haircuts and Systemic Illiquidity
In: EFL Quarterly, 1/2017; Frankfurt am Main
Category: Miscellaneous [Find it]
Reference No.: 2017-98
Siering, M.; Clapham, B.; Engel, O.; Gomber, P. (2017)
A Taxonomy of Financial Market Manipulations: Establishing Trust and Market Integrity in the Financialized Economy Through Automated Fraud Detection
In: Journal of Information Technology, Vol. 32, No. 3, pp. 251-269
Category: Publications in scientific journals [Find it]
AbstractFinancial market manipulations represent a major threat to trust and market integrity in capital markets. Manipulations contribute to mispricing, market imperfections and an increase in transaction costs for market participants and in costs of capital for issuers. Manipulations are facilitated by increased transaction velocity, speculative trading and abusive usage of new trading technologies, i.e., they are directly linked to financial sector changes that drive financialization. Research at the intersection of financialization and IS might support regulatory authorities and market operators in improving market surveillance and helping to detect fraudulent activities. However, confusing terminology is prevalent on financial markets with respect to different manipulation techniques and their characteristics, which hampers efficient fraud detection. Furthermore, recognizing manipulations is challenging given the large number of information sources and the vast number of trades occurring not least because of high-frequency traders. Therefore, automated market surveillance tools require a comprehensive taxonomy of financial market manipulations as a basis for appropriate configuration. Based on a cluster analysis of SEC litigation releases, a review of the latest market abuse regulation and academic studies, we develop a taxonomy of manipulations that structures and details existing manipulation techniques and reveals how these techniques differ along several dimensions. In a case study, we show how the taxonomy can be utilized to guide the development of appropriate decision support systems for fraud detection.
Reference No.: 2017-96
Gomber, P.; Clapham, B.; Haferkorn, M.; Panz, S.; Jentsch, P. (2017)
Ensuring Market Integrity and Stability - Circuit Breakers on International Trading Venues
In: The Journal of Trading, Vol. 12, No. 1, pp. 42-54
Category: Publications in journals [Find it]
AbstractCircuit breakers are important mechanisms used to prevent excess short-term volatility and to ensure price continuity. This article presents the results of an international survey on the design and application of circuit breakers on trading venues worldwide. The majority (86%) of the responding trading venues apply circuit breakers and thereby aim to ensure investor protection and increase market integrity and stability. On cash markets, market-wide trading halts and volatility interruptions are the most prevalent types of circuit breakers (72%). On derivatives markets, most exchanges coordinate their circuit breaker with their cash market (40%), followed by marketwide trading halts (20%) and volatility interruptions (13%). Most circuit breakers do not differentiate between upward and downward market movements. There is also support for greater coordination of circuit breakers across venues, and a few exchanges (32%) already coordinate their circuit breakers with other venues.
Reference No.: 2017-95
Glaser, F. (2017)
Pervasive Decentralisation of Digital Infrastructures: A Framework for Blockchain enabled System and Use Case Analysis
In: Proceedings of the 50th Hawaii International Conference on System Sciences (HICSS 2017); Waikoloa Village, Hawaii, USA
Category: Proceedings [Find it]
Reference No.: 2017-1
Gomber, P.; Sagade, S.; Theissen, E.; Weber, M.; Westheide, C. (2017)
Competition Between Equity Markets: A Review of the Consolidation Versus Fragmentation Debate
In: Journal of Economic Surveys, Vol. 31, No. 3, pp. 792-814
Category: Publications in scientific journals [Find it]
AbstractTechnological advances and regulatory initiatives have led to the emergence of a competitive, but fragmented, equity trading landscape in several markets around the world. While these changes have coincided with benefits like reduced transaction costs, advancements in trading technology, and access to a diverse array of execution venues, regulators and market participants have also raised concerns about the welfare implications of innovations like dark pools as well as the resulting increase in execution complexity. Exchanges are often viewed as natural monopolies due to the presence of network externalities and economies of scale. However, heterogeneity in traders' preferences means that no single venue can serve the interests of all investors. Fragmentation of the marketplace can be seen as a direct outcome of this heterogeneity. In this paper, we review the theoretical and empirical literature examining the economic arguments and motivations underlying market fragmentation, the resulting implications for liquidity and price efficiency, and the role for public policy. Beyond the concerns for equity markets, the lessons from this literature are relevant for other asset classes experiencing an increase in competition between trading venues.
Reference No.: 2017-77
Gomber, P.; Gvozdevskiy, I. (2017)
Dark Trading under MiFID II
In: Regulation of the EU Financial Markets; Oxford University Press
Category: Chapter in book [Find it]
Reference No.: 2017-72
