Essays on financial markets

This thesis is a collection of three stand-alone essays. The first essay, Modelling the Maker-Taker Pricing in Financial Markets, investigates the trading fees charged by stock exchanges to brokers. In particular, it studies the maker-taker pricing structure which is a form of second degree price discrimination. This is a theoretical work which develops a model of a limit order book with a closed-form solution that proxies a modern electronic trading platform. The model builds on the current literature by introducing competition among exchanges and allowing depth to build, thus providing predictions for market quality (spread, depth, and volume) and trading activity (limit and market orders) following a change in the trading fees. Maker-taker fees are the most prominent pricing scheme amongst stock exchanges. The second essay, Assessing the Attributes and Implications of Mini Flash Crashes, investigates all mini flash crashes (MFCs) by U.S. equities between January 3, 2006 and February 3, 2011. A mini flash crash is defined as a change in the stock price that is larger than 0.8%, takes place in less than 1.5 seconds for at least 10 consecutive trades, and recovers to within 0.1% of the starting price. This is an empirical work that explores both the causes (or attributes) and implications of MFCs, and it is concluded that MFCs negatively affect market quality (measured as inside spread and BBO depth) over a 10-minute window around the MFC. Besides, the phenomenon of MFCs has deep repercussions on market agents, e.g. brokers trading at the volume-weighted average price. The third essay, Leadership of the Price Discovery Process at Outer Levels of the Book, investigates price discovery, defined as the impounding of newly formed fundamental information into the observed price of the asset, and measured by the contribution different trading venues make to the common efficient price. This work contributes to the literature by showing that the market which leads the price discovery process at the BBO needs not enjoy leadership at other levels of the book, particularly at outer levels, i.e. levels that are distant from the BBO. This is of relevance since less than 50% of liquidity is posted to the BBO so focusing exclusively on the first level of the book does not provide a full understanding of which market truly leads the price discovery process.