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

  • Ethan Cohen-Cole

    (University of Maryland - College Park)

  • Andrei Kirilenko

    (Commodity Futures Trading Commission)

  • Eleonora Patacchini

    (University of Rome "La Sapienza")

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.

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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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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1011.

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Length: 30 pages
Date of creation: 2010
Date of revision: Apr 2010
Handle: RePEc:eie:wpaper:1011
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  1. 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.
  2. Cohen-Cole, Ethan, 2006. "Multiple groups identification in the linear-in-means model," Economics Letters, Elsevier, vol. 92(2), pages 157-162, August.
  3. Allen, Franklin & Babus, Ana & Carletti, Elena, 2010. "Financial Connections and Systemic Risk," Working Papers 10-20, University of Pennsylvania, Wharton School, Weiss Center.
  4. Aureo de Paula, 2004. "Inference in a Synchronization Game with Social Interactions," PIER Working Paper Archive 07-017, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 May 2007.
  5. Ethan Cohen-Cole & Giulio Zanella, 2007. "Unpacking social interactions," Risk and Policy Analysis Unit Working Paper QAU07-4, Federal Reserve Bank of Boston.
  6. 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.
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