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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Banking & Finance, Volume 32, Issue 10, October 2008, Pages 2248–2253
This paper examines the impact that the introduction of a closing call auction had on market quality at the London Stock Exchange. Using estimates from the partial adjustment with noise model of Amihud and Mendelson [Amihud, Y., Mendelson, H., 1987. Trading mechanisms and stock returns: An empirical investigation. Journal of Finance 42, 533–553] we show that opening and closing market quality improved for participating stocks. When we stratify our sample securities into five groups based on trading activity we find that the least active securities experience the greatest improvements to market quality. A control sample of stocks are not characterized by discernable changes to market quality.
At the London Stock Exchange, the search for an optimal market structure has encouraged some substantial changes to its trading system in recent years. Most notably, the introduction of SETS (Stock Exchange Electronic Trading System) brought an opening call auction and intraday continuous auction trading to London in 1997. This auction system evolved in 2000 to include a closing call auction. Changes to the trading system are important because market architecture has been shown to exert a strong influence on market quality. Huang and Stoll (1996), in their cross market analysis of liquidity, showed that bid-ask spreads for matched stocks were higher on the NASDAQ dealer market than on the NYSE auction market. Madhavan (1992) demonstrated that volatility is lower and pricing efficiency higher in an auction market. While, Amihud et al., 1997, Muscarella and Piwowar, 2001 and Chelley-Steeley, 2006 highlighted that changes to the trading system can influence firm value. An advantage of call markets noted by Madhavan (1992) is that they provide lower volatility and higher pricing efficiency than other forms of market structure. This was supported by Amihud and Mendelson (1991) in their study of the Japanese market. In this market there are two call auctions, one at the open and one after a lunchtime closure. They found that returns from the lunchtime call displayed higher pricing efficiency than returns generated from either the morning or afternoon closures or the opening call auction.1 The benefits of a call auction were also noted by Amihud et al. (1990) who showed that volatility associated with continuous trading on the Milan exchange was higher when continuous trading was not preceded by a call auction. Moreover, when Paris Euronext introduced a closing call auction in two tranches during 1996 and 1998. Pagano and Schwartz (2003) discovered that this change led to a reduction in execution costs and an enhancement to price discovery.2 This finding was supported by both Ko et al., 1995 and Comerton-Forde et al., 2003 who examined the Korea and Singapore markets, respectively. We estimate the partial adjustment model with noise of Amihud and Mendelson (1987) to obtain estimates of the partial adjustment parameter. This coefficient is a useful measure of market quality as it captures how quickly security prices adjust to new information. Using estimates of the intrinsic value obtained from the model we calculate pricing efficiency as the extent to which observed prices diverge from estimated intrinsic levels. Using these two metrics we gauge whether the introduction of the London closing call auction improved market quality. We show that for participating securities, the introduction of the call auction in London improved market quality at both the close and the open. In contrast, there are not measurable improvements to market quality for control securities. When we segregate our sample into five groups based on pre-call trading activity we find that the securities in the least active group benefit most from the introduction of the call auction. The remainder of this paper is set out as follows. Section 2 describes the trading system at the London Stock Exchange, Section 3 describes our measures of market quality, and Section 4 describes the methodology. Section 5 describes the data. Section 6 provides the results and Section 7 provides some conclusions.
نتیجه گیری انگلیسی
This paper has explored whether the implementation of a closing call auction in London led to an increase in market quality at the open and the close. London is a particularly interesting market to study because since the introduction of the auction trading system SETS in 1997 a parallel dealer market has operated providing traders with a choice of markets in which to transact. We measure market quality by estimating the partial adjustment model with noise proposed by Amihud and Mendelson (1987). This model allows us to measure how quickly securities adjust to new intrinsic information and also enables us to measure pricing inefficiency. Our results show that the introduction of the closing call auction in London led to an increase in the speed prices adjust to new information. We also show that those securities engaging in the closing call auction also experienced a notable rise in pricing efficiency. Our paper also shows that market quality improved at the open in the post-call period corroborating previous studies that have shown that there are strong market quality spillovers between the close and open. When we examine five portfolios formed on the basis of trading volume we show that the largest increases in pricing efficiency tend to be associated with those securities that are least actively traded. We do not find notable changes in market quality associated with a control group.