Trading activity and price impact in parallel markets: SETS vs. off-book market at the London Stock Exchange

Angelo Carollo, Gabriella Vaglica, Fabrizio Lillo and Rosario Mantegna

Quantitative Finance, 2012, vol. 12, issue 4, 517-530

Abstract: We study empirically the trading activity in the electronic on-book segment and in the dealership off-book segment of the London Stock Exchange, investigating separately the trading of active market members and of other market participants who are non-members. We find that (i) the volume distribution of off-book transactions has a significantly fatter tail than that of on-book transactions, (ii) groups of members and non-members can be classified in categories according to their trading profile, (iii) there is a strong anticorrelation between the daily inventory variation of a market member due to on-book market transactions and an inventory variation due to off-book market transactions with non-members, and (iv) the autocorrelation of the sign of the orders of non-members in the off-book market is slowly decaying. We also analyse the on-book price impact function over time, both for positive and negative lags, of the electronic trades and of the off-book trades. The unconditional impact curves are very different for the electronic trades and the off-book trades. Moreover, there is a small dependence of the impact on the volume for the on-book electronic trades, while the shape and magnitude of the impact function of off-book transactions strongly depend on volume.

Date: 2012
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DOI: 10.1080/14697688.2012.664910

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