Market Microstructure In Practice (Second Edition) by Lehalle Charles-Albert Laruelle Sophie & Sophie Laruelle

Author:Lehalle, Charles-Albert,Laruelle, Sophie & Sophie Laruelle
Language: eng
Format: epub
ISBN: 9789813231146
Publisher: World Scientific Publishing Company
Published: 2018-05-15T00:00:00+00:00

2.3.1.The bid–ask spread and volatility move accordingly

The daily bid–ask spread increases with daily volatility, as shown in Figure 2.13. In fact, as mentioned earlier, it rewards the risk taken by market-makers. The higher the volatility, the higher market-makers ask for to compensate for their possible losses. For that matter, the market context determines an incompressible value of the bid–ask spread. Note that Figure 2.13(b) is an illustration of the role played by the tick size in this relationship. The importance of tick size when several venues are competing against each other is developed in Section 1.3 of Chapter 1.

Periods of extremely high volatility, or, on the other hand, periods when markets were relatively quiet are highlighted in Figure 2.13(a) via symbols. The dots represent the 2008 crisis when volatility broke a record unequaled since, and squares represent values in the quiet month of March 2012. Some dots are off-centered, they identify the August 2011 crisis, when the short selling ban prevented market-makers from fulfilling their engagements on financial stocks, and the bid–ask spread therefore over-weighted market risk.

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