Work in progress

Determinants of Limit Order Cancellations
(with Petter Dahlström and Lars Nordén)
Abstract: We investigate the economic rationale behind limit order cancellations from the perspective of liquidity suppliers. We predict that an order is cancelled whenever its expected revenue no longer exceeds the expected cost and we model how order profitability variation can be determined from changes in the state of the order book and the order queue position. Our empirical evidence supports the predictions in general and for orders submitted by high-frequency trading firms in particular. Consistent with our model approach, we find that order cancellation patterns are more consistent with market making than with liquidity demand strategies.

Do Volatility Extensions Improve the Quality of Closing Call Auctions?
(with Ester Félez Viñas)
Revise and resubmit at Financial Review
Blog | SSRN | Internet appendix
Abstract: To improve the efficiency of the closing price, many equity exchanges apply volatility extensions to their closing call auctions. If an imminent auction execution implies a large price change, the order submission period is extended to let traders reconsider their orders. This paper uses the introduction of closing auction volatility extensions at NASDAQ Nordic to provide the first analysis of the effects of such mechanisms. We find that the volatility extensions reduce transitory volatility and deter price manipulation at the close. Consistent with increased trust in the mechanism, the closing call auction attracts higher volumes after the change.

Resting working papers

Does Commonality in Illiquidity Matter to Investors?
(with Richard Anderson, Jane Binner, and Birger Nilsson)
Published 2013 as a Federal Reserve Bank of St Louis Working Paper
Abstract: This paper investigates whether investors are compensated for taking on commonality risk in equity portfolios. A large literature documents the existence and the causes of commonality in illiquidity, but the implications for investors are less understood. In a more than fifty year long sample of NYSE stocks, we find that commonality risk carries a return premium of at least 2.0 per cent annually. The commonality risk premium is statistically and economically significant, and substantially higher than what is found in previous studies. It is robust when controlling for illiquidity level effects, transaction costs, as well as variations in illiquidity measurement.

Best Execution: Can Institutional and Retail Investors Benefit from Fast and Fragmented Trading?
(with Michał Dzieliński and Lars Nordén)
Asian Finance Association Best Paper Award 2016
Abstract: Fast trading and fragmentation of volume make equity markets complex, leading retail and institutional investors to demand sophisticated brokerage services. In a sample of stock transactions in Swedish large-cap firms, we find that brokers who show high trading sophistication when trading their own book do not deliver comparable execution quality when trading on behalf of clients. Best execution legislation states that brokers should take all reasonable steps to maximize the execution quality when trading on behalf of clients. For institutional clients, the shortcoming in execution quality is primarily driven by brokers’ inability to route the transactions to the trading venue with the best price. For retail clients, in contrast, the shortcoming is due to poor liquidity timing and a strong reliance on active executions. Only institutional block trades benefit from execution by sophisticated brokers.