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Trading Mechanism (trading + mechanism)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	100%

Selected Abstracts

On the Magnet Effect of Price Limits

EUROPEAN FINANCIAL MANAGEMENT, Issue 5 2007
David Abad
G1; G14; D44 Abstract The ,magnet' or ,gravitational' effect hypothesis asserts that, when trading halts are rule-based, investors concerned with a likely impediment to trade advance trades in time. This behaviour actually pushes prices further towards the limit. Empirical studies about the magnet effect are scarce, most likely because of the unavailability of data on rule-based halts. In this paper, we use a large database from the Spanish Stock Exchange (SSE), which combines intraday stock specific price limits and short-lived rule-based call auctions to stabilise prices, to test this hypothesis. The SSE is particularly well suited to test the magnet effect hypothesis since trading halts are price-triggered and, therefore, predictable to some extent. Still, the SSE microstructure presents two particularities: (i) a limit-hit triggers an automatic switch to an alternative trading mechanism, a call auction, rather than a pure halt; (ii) the trading halt only lasts 5 minutes. We find that, even when prices are within a very short distance to the price limits, the probability of observing a limit-hit is unexpectedly low. Additionally, prices either initiate reversion (non limit-hit days) or slow down gradually (limit-hit days) as they come near the intraday limits. Finally, the most aggressive traders progressively become more patient as prices approach the limits. Therefore, both the price patterns and the trading behaviour reported near the limits do not agree with the price limits acting as magnetic fields. Consequently, we conclude that the switching mechanism implemented in the SSE does not induce traders to advance their trading programs in time. [source]

SWITCHING TO A TEMPORARY CALL AUCTION IN TIMES OF HIGH UNCERTAINTY

THE JOURNAL OF FINANCIAL RESEARCH, Issue 1 2010
David Abad
Abstract We evaluate a stock-specific circuit breaker implemented in several European stock exchanges, which consists of a short-lived call auction triggered by intraday stock-specific price limits. It differs from U.S. trading halts in that it is short-lived and nondiscretionary, and a trading mechanism (continuous or discrete) is always going. It differs from daily price limits in that trade prices are not restricted once the limit is hit. Intraday price ranges are smaller and adjusted to the recent volatility, so that limit hits are more frequent. We contribute to the debate about circuit breakers by enlarging the span of these mechanisms studied. [source]

Relative Efficiency of Price Discovery on an Established New Market and the Main Board: Evidence from Korea

ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES, Issue 4 2010
Kyong Shik Eom
G10; G14; G15 Abstract We examine the relative efficiency of price discovery between the new market (KOSDAQ) and the main board (KOSPI) in the Korean stock markets that have the same trading mechanism (i.e. electronic limit-order book), focusing on the comparisons of each market's efficiency of price discovery in three aspects: speed, degree, and accuracy. We find that, for our entire firm sample, price discovery on KOSDAQ is less efficient than on KOSPI. However, the price discovery of the most liquid group (top 40 stocks) on KOSDAQ turns out to be as efficient as the lowest group (top 160th,200th stocks) among the top 200 liquid stocks on KOSPI. These two quintiles are comparable in terms of their firm characteristics, so it appears that the greater overall efficiency of price discovery on KOSPI is due to the characteristics of its listed firms, rather than any inherent difference between a main board and a new market. We also find evidence that the speed of price discovery is mainly determined by turnover, whereas the accuracy of price discovery is mainly determined by turnover and intraday volatility. All together, our results provide some policy implications for developing or even developed countries eager to establish a viable new market. First, price discovery in a successful or viable new market in an emerging economy behaves as predicted in the market microstructure literature, even though that literature is based primarily on main boards in advanced stock markets. Second, price discovery in the most liquid group in a new market is more accurate, although slower, than in the lowest group among the liquid stocks on a main board; on balance, the main board and new market are comparable. Finally, the accuracy of price discovery is more (less) impacted by turnover (intraday volatility) on the new market than on the main board. [source]

Competing Mechanisms in a Common Value Environment

ECONOMETRICA, Issue 4 2000
Bruno Biais
Consider strategic risk-neutral traders competing in schedules to supply liquidity to a risk-averse agent who is privately informed about the value of the asset and his hedging needs. Imperfect competition in this common value environment is analyzed as a multi-principal game in which liquidity suppliers offer trading mechanisms in a decentralized way. Each liquidity supplier behaves as a monopolist facing a residual demand curve resulting from the maximizing behavior of the informed agent and the trading mechanisms offered by his competitors. There exists a unique equilibrium in convex schedules. It is symmetric and differentiable and exhibits typical features of market-power: Equilibrium trading volume is lower than ex ante efficiency would require. Liquidity suppliers charge positive mark-ups and make positive expected profits, but these profits decrease with the number of competitors. In the limit, as this number goes to infinity, ask (resp. bid) prices converge towards the upper (resp. lower) tail expectations obtained in Glosten (1994) and expected profits are zero. [source]

Price clustering in E-mini and floor-traded index futures

THE JOURNAL OF FUTURES MARKETS, Issue 3 2006
Huimin Chung
This article sets out to investigate price clustering in both the open-outcry (floor-traded) and electronically traded (E-mini) index futures markets of the DJIA, S&P 500, and NASDAQ-100 indices. The results show that although price clustering is ubiquitous in both the floor-traded and E-mini index futures markets, it nevertheless tends to be higher for open-outcry index futures, with the clustering in floor-traded NASDAQ-100 index futures demonstrating the highest level (97%) at zero digits. A significant increase was also found in price clustering in floor-traded index futures after the introduction of E-mini futures trading. The results tend to suggest that those trading mechanisms that involve higher levels of human participation, such as the open-outcry markets, may well lead to increased incidences of price clustering. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26: 269,295, 2006 [source]