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Market microstructure and Fintech

Fintech innovation has enabled the growth of algorithmic trading and high frequency trading (HFT), and the development of increasingly complex financial instruments and trading strategies.

Through Blockchain technology, it has also paved the way for new financial assets such as cryptocurrencies. CAIR research analyses the impact of these and associated developments on the operation, efficiency and stability of financial markets.

Our research into market microstructure and Fintech

Research from Sarah Zhang shows that stock-specific news has significant effects on stock returns and net trading. Using NASDAQ trade & Reuters news data, she finds that the response of aggressive non-high-frequency traders (nHFTs) to news is stronger than that of aggressive high-frequency traders (HFTs).

Due to the increasing prevalence of high-frequency algorithmic trading and Fintech developments like Blockchain, there is a shift towards very short trading horizons and immediate settlement. This creates a demand for an ultra-short tenor interest rate curve that is updated in real-time. A paper co-authored by Professor Ser-Huang Poon develops a practical market model for the equilibrium intraday interest rates which provides market makers adequate incentives to attenuate flash crashes. The model suggests that if the intraday CHF interest rates had been highly negative during the flash crash of EURCHF on 15 January 2015, it may have potentially stopped the long CHF/short EUR trading strategy, reducing the severity of the crash.

New research from Professor Stuart Hyde and Dr Sarah Zhang finds that Bitcoin behaves differently to traditional currencies where positive and negative news is concerned, suggesting an investor enthusiasm for Bitcoin irrespective of the sentiment of the news. Traditional currencies typically experience a decrease in returns after negative news arrivals and an increase in returns following positive news whereas Bitcoin reacts positively to both positive and negative news. This phenomenon is exacerbated during bubble periods. Conversely, cryptocurrency cyber-attack news and fraud news dampen this effect, decreasing Bitcoin returns and volatility.

Market microstructure and Fintech workshop | Manchester | September 2017
Academics and Practitioners from around the world visiting Manchester for a workshop on market microstructure and Fintech. Co-funded by CAIR and the Alliance Manchester Business School Strategic Investment Fund, the 1-day workshop saw a total of 14 speakers present their latest research and insights.