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Are Networks Priced? Network Topology and Order Trading Strategies in High Liquidity Markets

Author

Listed:
  • Ethan Cohen-Cole

    (University of Maryland - College Park)

  • Andrei Kirilenko

    (Commodity Futures Trading Commission)

  • Eleonora Patacchini

    (University of Rome "La Sapienza")

Abstract

Network spillovers explain as much as 90% of the individual variation in returns in a fully electronic market. We study two fully electronic, highly liquid markets, the Dow an S&P 500 e-mini futures markets. Within these markets, we use a unique dataset of realized trades that includes the precise topology of transactions; this topology allows us to identify precisely both the relevance of network structure as well as endogenous network spillovers. Within these markets, we will show that network positioning on the part of trader leads to remarkable spillovers in return. Empirically, we estimate that the implied average multiplier, the ratio of a individual level shock to the total network one, is as large as 20. A gain of $1 for a trader leads to an average of $20 in gains for all traders and much more for connected ones. In a zero-sum market, such as the one in this study, this suggests a very large re-allocation of returns according to network structure.

Suggested Citation

  • Ethan Cohen-Cole & Andrei Kirilenko & Eleonora Patacchini, 2010. "Are Networks Priced? Network Topology and Order Trading Strategies in High Liquidity Markets," EIEF Working Papers Series 1011, Einaudi Institute for Economics and Finance (EIEF), revised Apr 2010.
  • Handle: RePEc:eie:wpaper:1011
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    File URL: http://www.eief.it/files/2012/09/wp-11-are-networks-priced_network-topology-and-order-trading-strategies-in-high-liquidity-markets.pdf
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    References listed on IDEAS

    as
    1. Bramoullé, Yann & Saint-Paul, Gilles, 2010. "Research cycles," Journal of Economic Theory, Elsevier, pages 1890-1920.
    2. Antoni Calvo-Armengol & Eleonora Patacchini & Yves Zenou, 2008. "Peer Effects and Social Networks in Education," CReAM Discussion Paper Series 0814, Centre for Research and Analysis of Migration (CReAM), Department of Economics, University College London.
    3. Bramoullé, Yann & Djebbari, Habiba & Fortin, Bernard, 2009. "Identification of peer effects through social networks," Journal of Econometrics, Elsevier, vol. 150(1), pages 41-55, May.
    4. Franklin Allen & Ana Babus & Elena Carletti, 2010. "Financial Connections and Systemic Risk," NBER Chapters,in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
    5. Antoni Calvó-Armengol & Eleonora Patacchini & Yves Zenou, 2009. "Peer Effects and Social Networks in Education," Review of Economic Studies, Oxford University Press, vol. 76(4), pages 1239-1267.
    6. de Paula, Áureo, 2009. "Inference in a synchronization game with social interactions," Journal of Econometrics, Elsevier, pages 56-71.
    7. Ethan Cohen-Cole & Giulio Zanella, 2008. "Unpacking Social Interactions," Economic Inquiry, Western Economic Association International, vol. 46(1), pages 19-24, January.
    8. Cohen-Cole, Ethan, 2006. "Multiple groups identification in the linear-in-means model," Economics Letters, Elsevier, vol. 92(2), pages 157-162, August.
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    Cited by:

    1. Henry, Jérôme & Kok, Christoffer & Amzallag, Adrien & Baudino, Patrizia & Cabral, Inês & Grodzicki, Maciej & Gross, Marco & Halaj, Grzegorz & Kolb, Markus & Leber, Miha & Pancaro, Cosimo & Sydow, Matt, 2013. "A macro stress testing framework for assessing systemic risks in the banking sector," Occasional Paper Series 152, European Central Bank.
    2. Silvia Gabrieli, 2011. "The microstructure of the money market before and after the financial crisis: a network perspective," CEIS Research Paper 181, Tor Vergata University, CEIS, revised 19 Jan 2011.
    3. Cohen-Cole, Ethan & Patacchini, Eleonora & Zenou, Yves, 2011. "Systemic Risk and Network Formation in the Interbank Market," CEPR Discussion Papers 8332, C.E.P.R. Discussion Papers.
    4. Gabrieli, S., 2012. "Too-connected versus too-big-to-fail: banks’ network centrality and overnight interest rates," Working papers 398, Banque de France.

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