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|a Fast trading and the virtue of entropy
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|a Focusing on the foreign exchange reaction to macroeconomic announcements, we show that fast trading is positively and significantly correlated with the entropy of the distribution of quoted prices in reaction to news: a larger share of fast trading increases the degree of diversity of quotes in the order book, for given liquidity, order book depth and size of order flows. Exploiting the WM Reuters' reform of the fixing methodology in February 2015 as a natural experiment, we provide evidence that fast trading raises entropy, rather than reacting to it. While more entropy in quoted prices means noisier information and arguably complicates price discovery from an individual trader's perspective, we show that, in the aggregate, more entropy actually brings traded prices closer to the random walk hypothesis, and improves indicators of market efficiency and quality of trade execution. We estimate that a 10 percent increase in entropy reduces the negative impact of macro news by over 60% for effective spreads, against over 40% for realized spreads and price impacts. Our findings suggest that the main mechanism by which fast trading may have desirable effects on market performance specifically hinges on enhanced heterogeneity in trading patterns, best captured by entropy.
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Focusing on the foreign exchange reaction to macroeconomic announcements, we show that fast trading is positively and significantly correlated with the entropy of the distribution of quoted prices in reaction to news: a larger share of fast trading increases the degree of diversity of quotes in the order book, for given liquidity, order book depth and size of order flows. Exploiting the WM Reuters' reform of the fixing methodology in February 2015 as a natural experiment, we provide evidence that fast trading raises entropy, rather than reacting to it. While more entropy in quoted prices means noisier information and arguably complicates price discovery from an individual trader's perspective, we show that, in the aggregate, more entropy actually brings traded prices closer to the random walk hypothesis, and improves indicators of market efficiency and quality of trade execution. We estimate that a 10 percent increase in entropy reduces the negative impact of macro news by over 60% for effective spreads, against over 40% for realized spreads and price impacts. Our findings suggest that the main mechanism by which fast trading may have desirable effects on market performance specifically hinges on enhanced heterogeneity in trading patterns, best captured by entropy. |
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Corsetti, Giancarlo 1960- VerfasserIn (DE-588)128969954 (DE-627)386152500 (DE-576)167563661 aut, Fast trading and the virtue of entropy evidence from the foreign exchange market Giancarlo Corsetti, Romain Lafarguette, Arnaud Mehl, Frankfurt am Main, Germany European Central Bank [2019], 1 Online-Ressource (circa 52 Seiten) Illustrationen, Text txt rdacontent, Computermedien c rdamedia, Online-Ressource cr rdacarrier, Working paper series / European Central Bank no 2300 (July 2019), Focusing on the foreign exchange reaction to macroeconomic announcements, we show that fast trading is positively and significantly correlated with the entropy of the distribution of quoted prices in reaction to news: a larger share of fast trading increases the degree of diversity of quotes in the order book, for given liquidity, order book depth and size of order flows. Exploiting the WM Reuters' reform of the fixing methodology in February 2015 as a natural experiment, we provide evidence that fast trading raises entropy, rather than reacting to it. While more entropy in quoted prices means noisier information and arguably complicates price discovery from an individual trader's perspective, we show that, in the aggregate, more entropy actually brings traded prices closer to the random walk hypothesis, and improves indicators of market efficiency and quality of trade execution. We estimate that a 10 percent increase in entropy reduces the negative impact of macro news by over 60% for effective spreads, against over 40% for realized spreads and price impacts. Our findings suggest that the main mechanism by which fast trading may have desirable effects on market performance specifically hinges on enhanced heterogeneity in trading patterns, best captured by entropy., Lafarguette, Romain VerfasserIn aut, Mehl, Arnaud VerfasserIn (DE-588)171857860 (DE-627)323635490 (DE-576)132617870 aut, Europäische Zentralbank Working paper series no 2300 (July 2019) 2300 (DE-627)372370322 (DE-576)108090442 (DE-600)2123559-4 1725-2806, https://doi.org/10.2866/542919 Resolving-System kostenfrei Volltext, https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2300~68bda93b78.en.pdf Verlag kostenfrei Volltext, http://hdl.handle.net/10419/208334 Resolving-System kostenfrei, https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2300~68bda93b78.en.pdf LFER, LFER 2019-08-12T00:00:00Z |
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Corsetti, Giancarlo, Lafarguette, Romain, Mehl, Arnaud, Fast trading and the virtue of entropy: evidence from the foreign exchange market, Europäische Zentralbank, Working paper series, no 2300 (July 2019), Focusing on the foreign exchange reaction to macroeconomic announcements, we show that fast trading is positively and significantly correlated with the entropy of the distribution of quoted prices in reaction to news: a larger share of fast trading increases the degree of diversity of quotes in the order book, for given liquidity, order book depth and size of order flows. Exploiting the WM Reuters' reform of the fixing methodology in February 2015 as a natural experiment, we provide evidence that fast trading raises entropy, rather than reacting to it. While more entropy in quoted prices means noisier information and arguably complicates price discovery from an individual trader's perspective, we show that, in the aggregate, more entropy actually brings traded prices closer to the random walk hypothesis, and improves indicators of market efficiency and quality of trade execution. We estimate that a 10 percent increase in entropy reduces the negative impact of macro news by over 60% for effective spreads, against over 40% for realized spreads and price impacts. Our findings suggest that the main mechanism by which fast trading may have desirable effects on market performance specifically hinges on enhanced heterogeneity in trading patterns, best captured by entropy. |
| title |
Fast trading and the virtue of entropy: evidence from the foreign exchange market |
| title_auth |
Fast trading and the virtue of entropy evidence from the foreign exchange market |
| title_full |
Fast trading and the virtue of entropy evidence from the foreign exchange market Giancarlo Corsetti, Romain Lafarguette, Arnaud Mehl |
| title_fullStr |
Fast trading and the virtue of entropy evidence from the foreign exchange market Giancarlo Corsetti, Romain Lafarguette, Arnaud Mehl |
| title_full_unstemmed |
Fast trading and the virtue of entropy evidence from the foreign exchange market Giancarlo Corsetti, Romain Lafarguette, Arnaud Mehl |
| title_in_hierarchy |
no 2300 (July 2019). Fast trading and the virtue of entropy: evidence from the foreign exchange market ([2019]) |
| title_short |
Fast trading and the virtue of entropy |
| title_sort |
fast trading and the virtue of entropy evidence from the foreign exchange market |
| title_sub |
evidence from the foreign exchange market |
| url |
https://doi.org/10.2866/542919, https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2300~68bda93b78.en.pdf, http://hdl.handle.net/10419/208334 |
