قرار گرفتن در معرض بازارهای جهانی و بهره وری قیمت: تجزیه و تحلیل تجربی از پویایی جریان سفارش شرکت های هندی NYSE

We examine the effect of global competition for order flows, which arise due to listing of American Depository Receipts (ADRs) by six Indian firms on the NYSE, on the local market. Using order imbalance data for six months pre- and post-listing periods, which captures order flow dynamics, we show that price formation is more efficient in the post-listing period compared to pre-listing period. We also provide additional evidence on the local market quality due to ADRs listing.

Temporal imbalance of buy and sell orders in a stock market is commonly termed as order imbalance. In the recent literature there has been a thorough investigation on the role of such imbalance on stock prices in the US market.1 Existing evidence suggests that there is significant and strong positive serial dependence in the order imbalance data. After controlling for volume, in the short run, order imbalance data can predict stock returns. Thus, order imbalance has gained considerable attention as one of the main determinants of price movements. Order imbalance can reveal concealed information in the gross volume and thus helps to gain our understanding on the relationship between trading activity, volume and price movements. Chordia and Subrahmanyam (2004) point out that the concealed information in volume that can be extracted through order imbalance data mainly comes from two sources: (1) market maker inventory adjustment, and (2) partial adjustment process of private information. Chordia, Roll, and Subrahmanyam (CRS) (Chordia et al., 2005) relate the effects of order imbalance to overall market efficiency. They empirically show that, in NYSE-listed securities, the order flow dynamics between naïve investors, specialists and arbitrageurs makes NYSE market returns a random walk at a daily interval. They argue that the temporal order imbalances, which are positively correlated, are due to sequential trading and corresponding herding behavior of naïve investors. To reduce these imbalances, which might increase the inventory risk, specialists tilt the prices away from equilibrium levels. This triggers arbitrageurs to offer countervailing strategies and thus bring prices back to the equilibrium levels. Thus, the inventory effect (through specialists) is linked to the information effect (through arbitrageurs) in attaining market efficiency. In this paper we address the same issue when firms are cross-listed in both, competing exchanges and exchanges with different trading mechanism. For this purpose we use Indian firms that are cross-listed in two local exchanges and one global or international exchange, namely, National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and New York Stock Exchange (NYSE). CRS is set in an exchange with market making facility and thus there is explicit inventory problem. In pure order driven markets like BSE and NSE there is no explicit inventory problem as there is no market making mechanism. Lee et al. (2004) examined order imbalance effects in a periodic call auction market (Taiwan Stock Exchange) and found that large institutional traders act as de facto market makers. 2 This might be due to similar inventory problems, as that of a market maker, faced by institutional investors who generally maintain significant inventory of stocks. They show that, similar to the US market, order imbalance in Taiwan market will not persist for more than a day and market returns follow a random walk within a daily interval. Thus market attains efficiency without explicit market making as discussed in CRS. Hendershott and Seasholes, 2007 also demonstrate the CRS results holds when using changes in NYSE specialist inventories. However, the degree of persistence of order imbalance is an area of interest, as longer (shorter) duration of order imbalance persistence implies slower (faster) speed of adjustment of information into prices. The extent to which nature of trading mechanism absorbs shocks of order imbalance on a relative basis is still an unexplored area. Cross-listed stocks, in stock exchanges with different trading mechanisms provide an ideal setting to understand the relative efficiency of a given trading mechanism in absorbing the order imbalance shocks. Also cross-listed stocks will provide an opportunity to observe whether competition between exchanges for order flows has any effect on their relative efficiency. We aim to address the following three important issues relating to the order imbalance and relative market efficiency in a setting where markets compete for order flows: 1. Does local market efficiency improve when markets are fragmented and are open to global competition? 2. Does global order imbalance affect local prices? 3. Does global competition improves local market quality by reduction of spreads? Although there are several papers that address the effect of cross-listing on relative price discovery process, to our knowledge, ours is the first paper to address this issue in the order imbalance context. With order imbalance data we can improve our understanding on how order flow dynamics influence price discovery, especially when markets are open to global competition. We find the following evidence by using transactions based intraday data for six months pre- and post-listing of six cross-listed Indian firms: (1) Order imbalance can predict stock returns in both order driven (BSE and NSE) and quote driven (NYSE) trading mechanisms. There is no noticeable difference in the magnitude of the order imbalance influence in different trading mechanisms. However, in an order driven market, the reaction of traders to order flow dynamics vary based on the nature of order imbalance. Particularly in the case of NSE, traders react positively with the increase in the size of orders and negatively with the increase in the number of orders. Thus information based trades lead to herding, whereas, general increase in the trading activity leads to countervailing strategies. (2) There has been overall efficiency for the cross-listed Indian stocks post-ADRs listing. This confirms that order flow competition and corresponding market fragmentation leads to market efficiency. The results are stronger in the case of BSE market. BSE listed stocks had a dramatic improvement in their market efficiency post-ADRs listing. (3) We find that global effect in the form of NYSE listing is felt in the local market (NSE), however, vice versa does not hold. (4) We also find evidence of improvement in the local market quality through reduction of spreads. The evidence is more significant in BSE than in NSE market. The rest of the paper is arranged in six sections. Section 1 is followed by a brief discussion on the dynamics of Indian stock market evolution, as a response to globalization, in Section 2. We present testable hypotheses in Section 3. The details of our dataset are discussed in Section 4. The results are discussed in Section 5 and the paper ends with conclusions in Section 6.

In the light of growing evidence on the role of order imbalance to explain market efficiency, we examine whether exposure of local stock markets to order flow competition from a global stock market will improve overall market efficiency. We use six Indian stocks that are cross-listed in two local markets namely, NSE and BSE, and also in a global market- NYSE. We use Chordia, Roll and Subrahmanyam (Chordia et al., 2005) as the base for our analysis. Using value-weighted portfolio of these cross-listed stocks for the period six months before and after the listing date, we find that: (1) Order imbalance can predict stock returns in both order driven (BSE and NSE) and quote driven (NYSE) trading mechanisms. There is no noticeable difference in the magnitude of the order imbalance influence in different trading mechanisms. However, in an order driven market, the reaction of traders to order flow dynamics vary based on the nature of order imbalance measure. Particularly in the case of NSE, traders react positively with the increase in the size of orders and negatively with the increase in the number of orders. Thus, information based trades lead to herding, whereas, general increase in the trading activity leads to countervailing strategies. (2) There has been overall efficiency for the cross-listed Indian stocks post-ADRs listing. This confirms that order flow competition and corresponding market fragmentation lead to market efficiency. The results are stronger in the case of BSE market. BSE listed stocks witnessed dramatic improvement in the post-ADRs listing period. (3) We also find that global effect in the form of NYSE listing is felt in the local market (NSE), however, vice versa does not hold. Overall our results contradict with Krishnamurti et al. (2003) where the authors find NSE being more efficient than BSE at daily interval level and they attribute better efficiency of NSE to its governance structure. (4) There is weak evidence of improvement in market quality in the local market after global listing. This has been observed through reduction in spread in the local market for the cross-listed stocks. Again spreads in the BSE market decreased more compared to NSE market. (5) Finally we tried to address why BSE becomes more efficient with the advent of global competition for order flows. We find that BSE market performs better with increase in competition even at the local level before exposing to global competition. Future research should focus more on the differential impact of global competition on the local market. In summary, it is clear from our analysis that competition among markets leads to fragmentized and specialized markets with no single dominant player and competition improves overall efficiency.