Essays on Market Design and Market Quality

Abstract: This dissertation contains four studies on different market structures and their impact on market quality.Article I studies the effect of introducing stock index futures contracts on the underlying stocks. The results indicate a lower liquidity level in the underlying stocks. However, after introducing market makers to the futures market, liquidity improves in the underlying stocks while trading activity and volatility remain unchanged.Article II investigates price discovery in the gold futures markets in China and the US. The gold supply and demand from China have been among the world’s largest in recent years. The results show that the gold futures markets in China and the US are cointegrated. Despite its short history, the Chinese gold futures market contributes more to the price discovery than the US market.Article III examines the order aggressiveness of high-frequency traders (HFTs) and non-HFTs. We find that market-making HFTs follow their own group's previous order more than they follow other traders’ orders. Opportunistic HFTs and non-HFTs tend to split market orders into small portions and submit them in sequences. HFTs adhere strongly to the trade-off between waiting cost and the cost of immediate execution. Non-HFTs care less about this trade-off, but react somewhat stronger to volatility than HFTs.Article IV studies the impact of introducing contracted liquidity providers to the liquid stocks in Sweden. The results show that liquidity improves after the liquidity providers’ introduction. The liquidity improvement is not accompanied by a lower liquidity level on Chi-X, a major competitor to the Swedish market. Both the order processing cost and adverse selection cost reduce on the Swedish stock market after contracting the liquidity providers.