PUBLICATIONS
• “The Price Effects of Liquidity Shocks: A Study of SEC's Tick-Size Experiment” with Rui Albuquerque and Shiyun Song, Journal of Financial Economics, 2020, 138(3), 700–724
• “Why Discrete Price Fragments U.S. Stock Exchanges and Disperses Their Fee Structures” with Yong Chao and Mao Ye, Review of Financial Studies, 2019, 32(3), 1068–1101
• “Why Trading Speed Matters: A Tale of Queue Rationing under Price Controls” with Mao Ye, Review of Financial Studies, 2018, 31(6), 2157–2183
• “Discrete Pricing and Market Fragmentation: a Tale of Two-Sided Markets” with Yong Chao and Mao Ye, American Economic Review: Papers and Proceedings, 2017, 107(5), 196–199
• “What's Not There: The Odd-lot Bias in Market Data” with Maureen O'Hara and Mao Ye, Journal of Finance, 2014, 69(5), 2199–2236
- Lead to policy change of trade reporting rules in the United States
WORKING PAPERS
• “Information Aggregation and Market Feedback: Evidence from the introduction of the NASDAQ closing auction” with Shidong Shao, Wei Zhu, and Frank Zhang
- Revise and Resubmit to The Accounting Review
We examine how improvements in high-frequency price formation influence the feedback that financial markets provide to corporate decision makers, leveraging NASDAQ’s introduction of a closing call auction designed to improve the accuracy of daily closing prices by more efficiently aggregating order flow and the information it contains. Although this change primarily affects intraday trading mechanics and the timing of information incorporation, it generates meaningful real effects. After the auction’s adoption, corporate investment becomes more responsive to stock prices, especially for firms whose fundamentals are closely tied to macroeconomic conditions and growth opportunities, settings in which markets hold comparative informational advantages over managers. Additional analyses indicate greater managerial learning from prices: firms exhibit larger future earnings response coefficients, management forecasts become more sensitive to contemporaneous returns, and operating performance improves. Overall, the evidence suggests that improved information aggregation, beyond information processing or production, strengthens market feedback and shapes real economic decisions.
• “Asset Pricing with Supply Shocks” with Shidong Shao, Mao Ye, and Jason Zou
Exploiting the 2016 SEC Tick Size Pilot as a randomized controlled trial, we find that a 1% exogenous and uninformed reduction in share repurchases lowers stock prices by 2.3%. Although treatment and control firms announced similar repurchase programs, treatment firms repurchased 25% fewer shares due to an unforeseen conflict between the pilot and repurchase regulations. The unshocked control stocks allow us to absorb price spillovers and estimate a relative price multiplier. We show that the relative price multiplier approximates the own-price multiplier at the individual stock level. Households and investment advisors absorb most supply shocks, whereas pension funds amplify them.
• “How Index Funds Reshape Intraday Market Dynamics” with Wenxi Jiang and Siyuan Wu
This study examines the evolving intraday trading dynamics of U.S. equities driven by the rapid growth of index funds. To minimize tracking errors, passive indexers execute trades near the market close, enhancing stock liquidity relative to daytime averages. In response, informed traders—such as short sellers—strategically time their trades to take advantage of the improved liquidity and conceal private information. However, this shift is accompanied by a decline in price informativeness, suggesting that liquidity trading remains dominant near the close. We offer causal evidence for these effects by exploiting reconstitution events in the S&P 500 and Russell 1000/2000 indices.
• “Do Hidden Orders Contain Information? Evidence from Cross-sectional Returns and Corporate Events”
Using two unique data sets of NASDAQ stocks, I examine the influence and informational role of hidden orders in the NASDAQ. I find that as much as 20% of trading volume is executed against hidden orders, with 16% of the best bid and ask offers invisible to the public due to these orders. I find that hidden order submitters are: 1) well informed; 2) their hidden orders can generate a 13 bps return at the intraday day level; and 3) the portfolio of stocks with trades heavily executed against hidden buy orders outperforms the portfolio of stocks with trades heavily executed against hidden sell orders over a two-day horizon, but the return predictability disappears over a monthly horizon. Using Schedule 13D filings by hedge funds as informative corporate events, I find that executed hidden order imbalances increase before the events, consistent with the notion that informed traders use hidden orders.
• “The Diverse Impacts of the Order Protection Rule on Small and Large Orders: Top-of-Book or Whole-Book Protection?” with Yiping Lin and Yimeng Yu
This study investigates the diverse effects of the Order Protection Rule (OPR) on different order sizes in the U.S. and Canadian equity markets. We find that top-of-book protection in the U.S. enhances liquidity for small orders but impairs execution quality for large orders, while whole-book protection in Canada leads to high liquidity for both small and large investors. Furthermore, we provide insights into fragmentation resulting from the OPR and find the rule reduces fragmentation in the U.S. and increases fragmentation in Canada. Our research emphasizes the need for a comprehensive regulatory approach considering order sizes, execution likelihood, and market accessibility for best execution.
• “The Externalities of High-Frequency Trading” with Jiading Gai and Mao Ye
- 2014 AFA Annual Meeting
When price competition is constrained by tick size, speed allocates the resources due to the time priority rule. We demonstrate three implications of competition in speed. 1) We find more high-frequency liquidity provision for lower-price stocks with high market cap, where the one-cent tick size has a higher constraint on price competition. 2) Speed has no impact on (the price) of liquidity, because speed competition already implies that liquidity providers cannot undercut each other’s price. We find that exogenous technology improvements improving speed at a one millisecond, microsecond or nanosecond level do not lead to improvements in quoted spread, effective spread, trading volume or variance ratio. However, the cancellation/execution ratio increases, short-term volatility increases and market depth decreases. 3) It is relative speed that matters. We find evidence consistent with the quote stuffing hypothesis (Biais and Woolley, 2011) using NASDAQ channel assignment as identification. Competition in speed but not price leads to externalities based on the canonical definition of Laffont (2008). One possible policy solution is the deregulation of tick size or a decrease in the importance of time priority.
WORK in PROGRESS
• “Order Flows in the Closing Auction: Evidence from the Hong Kong Stock Market” with Kalok Chan and Yang Xiong