Tick Size and Informed Trading: Evidence from the Taiwanese Stock Market

We adopt the Sandås model for order-book equilibrium to examine informed trading on the Taiwanese stock market, a purely order-driven call-auction market. We find that adverse-selection cost is low for well-known stocks with high liquidity and low volatility, but cost is high for monitoring the order books of those stocks. Our empirical results show that the impact of adverse selection is greatest at the beginning of each trading day and that informed traders engage in stealth trading, supporting the stealth trading hypothesis. Finally, with the special tick size rules on the market, both adverse-selection cost and monitoring cost decline as tick size decreases.

Intraday analysis of regulation change in microstructure: evidence from an emerging market

PurposeThis study investigates the impact of simultaneously replacing both midday single-price call auction and lunch break with multi-price continuous trading on intraday volatility–volume patterns as well as the intraday volatility–volume nexus.Design/methodology/approachThe analysis utilises 150 m tick-by-tick transaction data related to 333 stocks traded on Borsa Istanbul Equity Market covering a period of 2 months prior to and following the change. In addition to graphic comparisons, the study uses difference in mean tests, panel-fixed generalized least squares (GLS), panel-random GLS and random-effects linear models with AR(1) disturbance regression estimations.FindingsThe results show that intraday volatility and trading volume form an inverse J-shape and are positively correlated. It is observed that the implementation of the regulation change decreased intraday volatility and increased trading volume. Additionally, the results indicate a negative volatility–liquidity and a positive volume–liquidity relationship, supporting the mixture of distribution hypothesis.Research limitations/implicationsEnhanced market efficiency provides greater opportunity for investment and risk management. Investors can benefit from the findings on the intraday volatility–volume nexus, which is an indicator of informed trading, and regulatory authorities can use volume to oversight volatility.Originality/valueThis very rare regulation change of the simultaneous replacement of the lunch break and midday call auction with continuous trading is investigated in the context of intraday volume and volatility. This study also expands upon some important findings on the volume–volatility nexus for the Turkish Stock Market.

Designing Call Auction Institutions to Eliminate Price Bubbles: Is English Dutch the Best?

The bubble-and-burst pattern in asset markets is among the most replicable results in experimental economics. Using controlled laboratory experiments, we compare mispricing in markets organized by standard double auction rules with mispricing in markets organized by two alternative sets of clock auctions. The double Dutch auction, shown to be more efficient than the double auction in past commodity market experiments, does not eliminate bubbles. However, the English Dutch auction yields prices reflective of underlying fundamentals and succeeds in taming bubbles even with inexperienced traders in a declining fundamental value environment with an increasing cash-to-asset ratio. (JEL C91, D44, G12)

Social responsibility of a stock exchange: Corporate governance at Borsa Istanbul

Accentuated intraday volatility and uncertainty leads to mispricing, inefficiency, and the potential unfair treatment of some market participants. As an important financial institution, the stock exchange is required to find mechanisms to reduce volatility for good corporate governance and for social responsibility. In this paper, one such mechanism, closing call auction, is explored in the actively traded industrials sector of the emerging Borsa Istanbul. Evidence of the successful implementation of the mechanism is provided. Volatility decreases and efficiency of the prices increases after the implementation of the closing call auction. The exchange executives’ positive engagement in good corporate governance is documented and is suggested to other stock exchanges as a social responsibility instrument.

A closing call’s impact on market quality: evidence from Abu Dhabi stock exchange

Purpose This paper aims to look at the effects of the closing call auction on market quality and behavior by using the natural experiment of its introduction at the Abu Dhabi Stock Exchange. Design/methodology/approach Current paper studies the effect of closing call auction on various market quality factors such as liquidity, bid-ask spreads, volatility and market efficiency. Liquidity is proxied by trading volume. Bid-ask spreads provide a measure for the cost of trading in the market. Volatility is measured by using Parkinson’s (1980) volatility as in Huang and Tsai (2008). Last but not least, efficiency will be obtained by estimating a relative return dispersion measure as in Huang and Tsai (2008). Findings The introduction of the closing call auction leads to a significant decrease in the trading volume toward the end of the continuous trading. At the same time, trading activity taking place during the call auction significantly increases. This implies a redistribution of liquidity. The implementation of the closing call auction also improves market quality by reducing market inefficiency in terms of firm-specific noise. The study also documents that there exists no significant change in the cost of trading and intraday volatility in the post-period following the adoption of closing call auction. Originality/value This current study is the first one looking at this topic for the Abu Dhabi Stock Exchange. Specifically, this paper looks at the changes in trading volume, bid-ask spreads, intraday return volatility and market efficiency after the implementation of the closing call mechanism.