We study how derivatives (with nonlinear payoffs) affect the liquidity of the underlying asset. In a rational expectations equilibrium, informed investors expect low conditional volatility and sell derivatives to the others. These derivative trades affect investors’ utility differently,...

Speeding up the exchange does not necessarily improve liquidity. On the one hand, more speed enables a high-frequency market maker (HFM) to update his quotes faster on incoming news. This reduces his payoff risk and thus lowers the competitive bid-ask spread. On the other hand, HFM price quotes...

We investigate the effects of introducing a central clearing counterparty (CCP) on securities prices by adopting as an experimental construct the 2009 CCP reform in three Nordic markets. We find that, relative to other European economies, these countries experience market-adjusted equity returns...

Speeding up the exchange does not necessarily improve liquidity. The price quotes of high-frequency market makers are more likely to meet speculative high-frequency "bandits", thus less likely to meet liquidity traders. The bid-ask spread is raised in response. The recursive dynamic model...