The Impact of IT-Based Trading on Securities Markets

The emergence of IT-based trading activities like algorithmic trading or high-frequency trading alters the traditional trading environment within financial markets. Thus, the question arises whether this technological arms race positively affects market quality or represents a risk related to market integrity. Within this study, we evaluate the order-to-trade-ratio for measuring overall IT-based trading activity. Furthermore, in a longitudinal study, we assess the impact of the order-to-trade-ratio on market quality. We find strong indications that price uncertainty has decreased with an increased order-to-trade-ratio and therefore has a positive impact on financial markets. However, the mere upgrade of the trading systems does not relate into increased market liquidity

OVERCONFIDENCE AND TRADING VOLUME: EVIDENCE FROM AN EMERGENT MARKET

It has been a challenge for financial economists to explain some stylized factsobserved in securities markets, among them, high levels of trading volume. The mostprominent explanation of excess volume is overconfidence. High market returns makeinvestors overconfident and as a consequence, these investors trade more subsequently andmake some transactions more aggressively. The aim of our paper is to study the impact of thephenomenon of overconfidence on the trading volume and its role in the formation of theexcess volume on the Tunisian stock market. Based on the work of Statman, Thorley andVorkink (2006) and by using VAR models and impulse response functions, we find a littleevidence of the overconfidence hypothesis when we use volume (shares traded) as proxy oftrading volume.overconfidence, disposition effect, trading volume, emergent market

Distributed Ledger Technology and the Securities Markets of the Future: A Stakeholder Survey

This Article evaluates the implications of distributed ledger technology (DLT) for the securities markets of the future and their regulation. DLT is an integral part of the larger revolution in computing, communication and data storage capacity that has transformed securities markets over the last few decades and promises further radical change in the years to come. The potential of DLT, if it can be realized, could improve the functioning of our securities markets while at the same time sharply reducing costs. Based on an interview survey of about 100 persons who play prominent roles in actually making these markets work or in regulating them, this Article reports on the most important topics and themes that have emerged from the wide range of interviewees’ opinions about the extent to which DLT will affect the future of securities markets and their regulation. A significant number saw the potential for DLT to transform securities markets and market structure, from the possibility of stock trading on DLT to the potential impact on intermediaries, the ordinary retail investor, and on preventing wrongdoing in the stock market. However, key questions remain about implementation and the appetite for making DLT-based changes among both market participants and regulators

Stock Markets Liquidity, Corporate Governance and Small Firms

While the importance of equity markets as a vehicle for capital formation is well recognized, their role in providing economically valuable governance services, particularly to small and medium enterprises (SME), has not received much attention. The paper examines the role of public policy in promoting the governance role of secondary equity markets for the benefit of SMEs. The paper first outlines the mechanisms through which equity markets could promote good governance in small firms, showing that equity markets serve as a monitoring and control conduit for outsiders to enforce good governance at the firm. It then establishes that the ability of equity markets to deliver good governance is closely related to those markets’ liquidity, presenting further international evidence that firms supported by liquid equity markets realize improved economic performance. Thus, the governance services of secondary equity markets have real economic value to the firms. The paper then argues that public policy can have a positive impact on the effectiveness of equity markets in delivering governance services through enhancing market liquidity. It examines the impact on market liquidity of two significant U.S. Securities and Exchange Commission (SEC) regulatory reforms applied to The Nasdaq Stock Market: SEC’s ‘trade reporting’ rules of 1992, and SEC’s “order handling” reforms of 1997. The paper concludes that public policies that increase market transparency and efficiency -- such as “trade reporting” requirements and better “order handling” rules -- promote the effectiveness of the secondary equity markets in delivering corporate governance through increased market liquidity.http://deepblue.lib.umich.edu/bitstream/2027.42/57263/1/wp883 .pd

Impersonal efficiency and the dangers of a fully automated securities exchange

This report identifies impersonal efficiency as a driver of market automation during the past four decades, and speculates about the future problems it might pose. The ideology of impersonal efficiency is rooted in a mistrust of financial intermediaries such as floor brokers and specialists. Impersonal efficiency has guided the development of market automation towards transparency and impersonality, at the expense of human trading floors. The result has been an erosion of the informal norms and human judgment that characterize less anonymous markets. We call impersonal efficiency an ideology because we do not think that impersonal markets are always superior to markets built on social ties. This report traces the historical origins of this ideology, considers the problems it has already created in the recent Flash Crash of 2010, and asks what potential risks it might pose in the future

Where do electronic markets come from? Regulation and the transformation of financial exchanges

The practices of high-frequency trading (HFT) are dependent on automated financial markets, especially those produced by securities exchanges electronically interconnected with competing exchanges. How did this infrastructural and organizational state of affairs come to be? Employing the conceptual distinction between fixed-role and switch-role markets, we analyse the discourse surrounding the design and eventual approval of the Securities and Exchange Commission’s Regulation of Exchanges and Alternative Trading Systems (Reg ATS). We find that the disruption of the exchange industry at the hands of automated markets was produced through an interweaving of both technological and political change. This processual redefinition of the ‘exchange’, in addition, may provide a suggestive precedent for understanding contemporary regulatory crises generated by other digital marketplace platforms

At the Water’s Hedge: International Insider-Trading Enforcement After Morrison

From copy rooms to boardrooms, many Americans have succumbed to the siren song of insider trading. As U.S. companies have gone international, so too have corporate secrets ripe for exploitation. With the growth of overseas derivatives based on U.S. stock, foreigners are able to engage in insider trading to a similar extent as Americans. But in Morrison v. National Australia Bank, the Supreme Court limited the reach of the statutory insider-trading prohibition to transactions taking place in U.S. territory or transactions in securities listed on U.S. exchanges. Neither condition applies to overseas insider trading using derivatives. However, courts have reasoned that when the trader’s broker hedges by buying stock on a U.S. exchange, that transaction can be attributed to the trader, thus bringing the scheme within Morrison. This hedging theory depends on the acts of third parties—the brokers—to create insider-trading liability, thus giving arbitrary windfalls to blameworthy traders and creating both evidentiary and legal hurdles for U.S. enforcement. Because Morrison has backed courts into this unworkable corner, it should not govern in insider-trading cases. There is a fix: the Dodd-Frank Wall Street Reform and Consumer Protection Act abrogated Morrison for enforcement actions, albeit imperfectly. By abandoning the theory in favor of Dodd-Frank’s pragmatic standard, courts can more nimbly and forcefully protect U.S. markets from foreign fraud

The Invisible Power of MacHines Revisiting the Proposed Flash Order Ban in the Wake of the Flash Crash

Technological innovation continues to make trading and markets more efficient, generally benefitting market participants and the investing public. But flash trading, a practice that evolved from high-frequency trading, benefits only a select few sophisticated traders and institutions with the resources necessary to view and respond to flashed orders. This practice undermines the basic principles of fairness and transparency in securities regulation, exacerbates information asymmetries and harms investor confidence. This iBrief revisits the Securities and Exchange Commission\u27s proposed ban on the controversial practice of flash trading and urges the Securities and Exchange Commission and the Commodity Futures Trading Commission to implement the ban across the securities and futures markets. Banning flash trading will not impact high-frequency trading or other advantageous innovative trading practices, and will benefit all market participants by making prices and liquidity more transparent. In the wake of the May 6, 2010 flash crash and the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, now is an opportune time for the Securities and Exchange Commission and Commodity Futures Trading Commission to implement the ban