Are Networks Priced? Network Topology and Order Trading Strategies in High Liquidity Markets

Network spillovers explain as much as 90% of the individual variation in returns in a fully electronic market. We study two fully electronic, highly liquid markets, the Dow an S&P 500 e-mini futures markets. Within these markets, we use a unique dataset of realized trades that includes the precise topology of transactions; this topology allows us to identify precisely both the relevance of network structure as well as endogenous network spillovers. Within these markets, we will show that network positioning on the part of trader leads to remarkable spillovers in return. Empirically, we estimate that the implied average multiplier, the ratio of a individual level shock to the total network one, is as large as 20. A gain of $1 for a trader leads to an average of $20 in gains for all traders and much more for connected ones. In a zero-sum market, such as the one in this study, this suggests a very large re-allocation of returns according to network structure.