The Euro as an International Currency: explaining puzzling first evidence from the foreign exchange markets

This paper presents evidence that the bid-ask spreads in euro rates increased relative to the corresponding bid-ask spreads in the German mark (DM) prior to the creation of the currency union. This comes with a decrease in transaction volume in the euro rates relative to the previous DM rates. The starkest example is the DM(euro)/yen rate in which the spread has risen by almost two-thirds while the volume decreased by more than one third. This outcome is surprising because the common currency concentrated market liquidity in fewer external euro rates and higher volume tends to be associated with lower spreads. We propose a microstructure explanation based on a change in the information environment of the FX market. The elimination of many cross currency pairs increased the market transparency for order flow imbalances in the dealership market. It is argued that higher market transparency adversely affects the inventory risk sharing efficiency of the dealership market and induces the observed euro spread increase and transaction volume shortfall.

Transparency Proposals for European Sovereign Bond Markets

The debate over the possible extension of transparency regulation in Europe to include sovereign bonds has opened up a number of other issues in need of serious consideration. One such issue is the appropriateness of the entire infrastructure supporting the trading of European sovereign bonds. In recent years sovereign issuers have supported the development of an electronic inter-dealer market but have remained unconcerned with the opacity of dealer-to-customer trading. The degree of segmentation in this market is high relative to what exists in nearly all other financial markets. This paper explores why European sovereign bond markets have developed in such a segmented way and considers how this structure could be altered to improve transparency without adversely affecting liquidity, efficiency or the benefits enjoyed by primary dealers and issuers. It is suggested that the structure of the market could be improved greatly if the largest and most active investors were permitted access to the inter-dealer electronic trading platforms. This would solve a number of market imperfections and increase the proportion of market activity that is conducted in a transparent way. The paper argues that sovereign issuers in Europe have the means to provide incentives that would influence dealers to support reduced segmentation. Some practical examples of how this could be achieved are provided and the potential benefits are outlined.

Price Discovery in the Dual-Platform US Treasury Market

Inter-dealer trading in US Treasury securities is almost equally divided between two electronic trading platforms that have only slight differences in terms of their relative liquidity and transparency. BrokerTec is more active in the trading of 2-, 5-, and 10-year T-notes while eSpeed has more active trading in the 30-year bond. Over the period studied, eSpeed provides a more pre-trade transparent platform than BrokerTec. We examine the contribution to ‘price discovery’ of activity in the two platforms using high frequency data. We find that price discovery does not derive equally from the two platforms and that the shares vary across term to maturity. This can be traced to differential trading activities and transparency of the two platforms.

Much Ado About Nothing: The Limitation of Liability and the Market for 19th century Irish Bank Stock

Abstract Limited liability is widely believed to be a prerequisite for the emergence of an active and liquid securities market because the transactions costs associated with trading ownership of unlimited liability firms are viewed as prohibitive. In this article, we examine the trading of shares in an Irish bank, which limited its liability in 1883. Using this bank’s archives, we assemble a time series of trading data, which we test for structural breaks. Our results suggest that the move to limited liability had a negligible impact upon the trading of this bank’s shares.

What motion distributions yield global transparency and spatial segmentation?

We have examined the ability of observers to parse bimodal local-motion distributions into two global motion surfaces, either overlapping (yielding transparent motion) or spatially segregated (yielding a motion boundary). The stimuli were random dot kinematograms in which the direction of motion of each dot was drawn from one of two rectangular probability distributions. A wide range of direction distribution widths and separations was tested. The ability to discriminate the direction of motion of one of the two motion surfaces from the direction of a comparison stimulus was used as an objective test of the perception of two discrete surfaces. Performance for both transparent and spatially segregated motion was remarkably good, being only slightly inferior to that achieved with a single global motion surface. Performance was consistently better for segregated motion than for transparency. Whereas transparent motion was only perceived with direction distributions which were separated by a significant gap, segregated motion could be seen with abutting or even partially overlapping direction distributions. For transparency, the critical gap increased with the range of directions in the distribution. This result does not support models in which transparency depends on detection of a minimum size of gap defining a bimodal direction distribution. We suggest, instead, that the operations which detect bimodality are scaled (in the direction domain) with the overall range of distributions. This yields a flexible, adaptive system that determines whether a gap in the direction distribution serves as a segmentation cue or is smoothed as part of a unitary computation of global motion.

Directional performance in motion transparency

Motion transparency provides a challenging test case for our understanding of how visual motion, and other attributes, are computed and represented in the brain. However, previous studies of visual transparency have used subjective criteria which do not confirm the existence of independent representations of the superimposed motions. We have developed measures of performance in motion transparency that require observers to extract information about two motions jointly, and therefore test the information that is simultaneously represented for each motion. Observers judged whether two motions were at 90 to one another; the base direction was randomized so that neither motion taken alone was informative. The precision of performance was determined by the standard deviations (S.D.s) of probit functions fitted to the data. Observers also made judgments of orthogonal directions between a single motion stream and a line, for one of two transparent motions against a line and for two spatially segregated motions. The data show that direction judgments with transparency can be made with comparable accuracy to segregated (non-transparent) conditions, supporting the idea that transparency involves the equivalent representation of two global motions in the same region. The precision of this joint direction judgment is, however, 2–3 times poorer than that for a single motion stream. The precision in directional judgment for a single stream is reduced only by a factor of about 1.5 by superimposing a second stream. The major effect in performance, therefore, appears to be associated with the need to compute and compare two global representations of motion, rather than with interference between the dot streams per se. Experiment 2tested the transparency of motions separated by a range of angles from 5 to 180 by requiring subjects to set a line matching the perceived direction of each motion. The S.D.s of these settings demonstrated that directions of transparent motions were represented independently for separations over 20. Increasing dot speeds from 1 to 10 deg/s improved directional performance but had no effect on transparency perception. Transparency was also unaffected by variations of density between 0.1 and 19 dots/deg2

Technology and the architecture of markets: re-configuring the Canadian equity market

This paper examines the relation between technical possibilities, liberal logics, and the concrete reconfiguration of markets. It focuses on the enrolling of innovations in communication and information technologies into the markets traditionally dominated by stock exchanges. With the development of capacities to trade on-screen, the power of incumbent market makers has been challenged as a less stable array of competing quasi-public and private marketplaces emerges. Developing a case study of the Toronto Stock Exchange, I argue that narrative emphasis on the performative power of sociotechnical innovations, the deterritorialisation of financial relations, and the erosion of state capacities needs qualification. A case is made for the importance of developing an understanding of: the spaces of encounter between emerging social technologies and property rights, rules of exchange, and structures of governance; and the interplay of orderings of different institutional composition and spatial reach in the reconfiguration of market architectures. Only then can a better grasp be gained of the evolving dynamics between making markets, the regulatory powers of the state, and their delimitations.