QRFE Seminar - Giovanni Cespa

Abstract: We show that, consistent with empirical evidence, access to order flow information allows traders to supply liquidity via contrarian marketable orders.  An informational friction resulting from lack of market transparency can, however, make liquidity demand upward sloping, inducing strategic complementarities: traders demand more liquidity when the market becomes less liquid, fostering market illiquidity. This can generate instability with an initial dearth of liquidity degenerating into a liquidity rout (as in a flash crash), an event that is more likely to occur when market opacity hampers liquidity supply via marketable orders. Our theory also predicts that, when the market is fragile, traders faced with the largest price impact are those consuming more liquidity at equilibrium.

Giovanni’s recent research focusses on the relationship between liquidity and asset pricing. His research has been published in the Review of Economic Studies, Management Science, the Journal of Finance, the Review of Financial Studies. He focuses on the impact of High Frequency Trading on market fragility, the welfare of market participants, and platform competition. The effect of insider trading disclosure in fragmented markets. The impact of ETF on market quality and welfare, in segmented markets.