The paper, "Looking into informal currency markets as Limit Order Books: impact of market makers," provides a detailed analysis of the Cuban informal currency market structure using the Limit Order Book (LOB) framework. This approach has traditionally been reserved for formal financial markets, primarily those in developed countries. The authors, Alejandro Garcìa Figal, Alejandro Lage Castellanos, and Roberto Mulet, introduce innovative methods to acquire and analyze data from informal markets through web scraping techniques applied to social media and dedicated currency exchange websites in Cuba. Their findings bridge the gap between informal and formal market analyses and offer insights into how market makers might improve informal market performance.
The authors apply the market microstructure framework, particularly modeling informal currency markets as LOBs, to gain insights into bid/ask price dynamics. This method characterizes market behavior by analyzing liquidity, stability, and volume profiles. The paper's use of scraped data enables a unique view into the Cuban market where financial services access is constrained.
Key findings reveal that the Cuban informal currency market exhibits low liquidity and a substantial bid-ask spread relative to the currency mid-price, pointing to an inefficient market structure. The daily execution ratio of orders is notably low, averaging only about 10%. This is a stark contrast to more liquid formal markets, where daily executions typically comprise a much larger fraction of the LOB volume. Additionally, price dynamics, manifested through price and spread behaviors, show that the LOB's statistical properties produce exponential distributions, which is uncommon in formal markets characterized by power-law distributions.
The paper exploits the Avellaneda-Stoikov model to assess the impact of introducing a market maker in the informal Cuban currency market. Market makers are typically liquidity providers operating on exchanges to maintain order flow and reduce volatility. Their presence in financial markets provides smoother price transitions and ensures tighter bid-ask spreads.
The simulations conducted demonstrate the market maker's role in improving the market quality. Despite the market's initial inefficiency, the introduction of market makers greatly enhances execution rates to about 40%, while simultaneously tightening the bid-ask spread. These improvements underscore the potential role of market makers in improving liquidity and reducing transactional costs, conditions that could foster better efficiency atypical to informal markets.
Implications and Future Developments
This paper emphasizes the practical implications for policymakers in resource-constrained environments who may consider leveraging market makers as a strategy for economic inclusion and development. The findings suggest that carefully designed interventions in informal markets could reduce inefficiencies and access barriers, offering vital benefits in regions relying heavily on such markets.
The integration of market makers in informal settings, however, introduces complexities that could be explored further. Future research could focus on the scalability of market makers in varying levels of economic development, or examine cross-market impacts on other informal financial settings.
Furthermore, this analysis prompts broader inquiry into how advanced AI and data-driven approaches could optimize informal market infrastructures, offering pathways for strategic interventions in economic systems globally.
In conclusion, the paper successfully demonstrates how the application of formal market structures, such as market microstructures, can yield transformative results for informal market settings. The introduction of market makers as part of these enhancements promises not only a conceptual shift but a tangible impact on market function and ultimately, financial accessibility.