PRICE AND QUANTITY QUOTES ON NASDAQ: A STUDY OF DEALER QUOTATION BEHAVIOR

We show that the majority of quotes posted by NASDAQ dealers are noncompetitive and only 19.5% (18.4%) of bid (ask) quotes are at the inside. The percentage of dealer quotes that are at the inside is higher for stocks with wider spreads, fewer market makers, and more frequent trading, and lower for stocks with larger trade sizes and higher return volatility. These results support our conjecture that dealers have greater incentives to be at the inside for stocks with larger market‐making revenues and smaller costs. Dealers post large depths when their quotes are at the inside and frequently quote the minimum required depth when they are not at the inside. The latter quotation behavior leads to the negative intertemporal correlation between dealer spread and depth.     

The Effectiveness of Price Limits and Stock Characteristics: Evidence from the Shanghai and Shenzhen Stock Exchanges

We examine the effectiveness of price limits on Chinese A shares and investigate the characteristics of those stocks that hit their price limits more frequently. We find that the effect of price limits is asymmetric for the A shares in upward and downward price movements and different for bullish and bearish sample periods. During a bullish period price limits effectively reduce stock volatility for downward price movements, but not for upward price movements; while during a bearish period price limits effectively reduce stock volatility for upward price movements, but not for downward price movements. Second, price limits delay efficient price discovery for upward price movements, but not for downward price movements. However, we do not find evidence to suggest that price limits harmfully interfere with the stock trading processes in the Chinese A share markets. Finally, we find that actively traded stocks hit their price limits more often and tend to hit the lower limit more frequently when overall market conditions are bearish. Stocks with high book-to-market values of equity hit their upper price limits more frequently, while stocks with a high ratio of tradable shares tend to hit their price limits less frequently.JEL Classification: G10, G14, G15     

The Cross-Section of Stock Returns on The Shanghai Stock Exchange

This study explores the cross-sectional stock return behavior on the A-share market of the Shanghai Stock Exchange (SSE), which is segmented from world's other equity markets. We estimate the effects of beta, firm size, book-to-market equity ratio and a variable unique to the Chinese stock markets, the proportion of firm's floating (tradable) equity over total equity on SSE stocks over the period 1993–2002. We find that smaller firms and value stocks perform better. Systematic risk is negatively significant in down markets. The proportion of floating equity has no direct effect on stock returns. JEL Classification: G14, G15     

Australian evidence on the determinants and impact of takeover resistance

In the present paper, we examine the determinants and impact of target bid resistance on the wealth of target shareholders and the takeover process in Australia. We find that bid resistance increases target shareholder wealth in the post‐announcement period and that the probability of bid hostility increases with the target's size, decreases with the target's performance and is unrelated to the size of the premium offered by the bidder. We also find that bid hostility decreases the probability of bid success, increases the probability of bid revision and has no effect on the probability of competing bidders entering the market.     

Share repurchase tender offers and bid–ask spreads

This paper examines the impact of share repurchase tender offers on the market microstructure. We find that there is a temporary reduction in the bid–ask spread, and a temporary increase in volume and quotation depth during the offer period. Our evidence suggests that the bid–ask spread is asymmetric during the offer period with the bid-side spread smaller than the ask-side spread. The temporary reduction in the spread around offers is consistent with the competing-market-maker hypothesis which predicts that the intensified competition for the market maker raises bid prices and narrows the spread asymmetrically during the offer period.     

THE EFFECTS OF DECIMALIZATION ON RETURN VOLATILITY COMPONENTS,SERIAL CORRELATION,AND TRADING COSTS

We examine the composition of return volatility, serial correlation, and trading costs before and after decimalization on the New York Stock Exchange. We decompose the variance of price changes into components associated with public news, rounding errors, and market‐making frictions. We find that when stocks move from a fractional to a decimal trading system, the variance components due to market‐making frictions and rounding errors decline significantly, whereas the component due to public news remains unchanged. The serial correlation of price changes weakens substantially after decimalization. The uninformed component of bid‐ask spreads decreases significantly whereas the informed component has no significant change.     

Effect of the ban on short selling on market prices and volatility

We examine the effects of the short‐selling ban, imposed by Australian regulators in the wake of the global financial crisis, on the trading of financial stocks. Our findings argue against commonly stated reasons for imposing short‐sale bans. We find no evidence that short‐sale restrictions provide support for stock prices or that they reduce volatility. Moreover, stocks subject to the short‐selling ban suffered a severe degradation in market quality. Controlling for the adverse effects of the financial crisis on markets, we show that short‐selling restrictions increase intraday volatility, reduce trading activity and increase bid–ask spreads.     

SMALL FIRM AND VALUE EFFECTS IN THE CANADIAN STOCK MARKET

We examine the relation among average returns, market beta, firm size, and book-to-market value for Canadian stocks during 1975–92. We document a negative relation between average return and the market capitalization of firms, but find no relation between average return and market beta. While the small firm effect is significant during a period of reduced capital gains tax, it is noticeably lower than during the period leading up to the change. We find that average returns are positively related to book-to-market value especially during the period of lower capital gains tax.     

Short-term market reaction after extreme price changes of liquid stocks

In our empirical study we examine the dynamics of the price evolution of liquid stocks after experiencing a large intra-day price change, using data from the NYSE and the NASDAQ. We find a significant reversal for both intra-day price decreases and increases. Volatility, volume and, in the case of the NYSE, the bid–ask spread, which increase sharply at the event, stay significantly high days afterwards. The decay of the volatility follows a power law in accordance with the `Omori law'. While on the NYSE the large widening of the bid–ask spread eliminates most of the profits that can be achieved by an outside investor, on the NASDAQ the bid–ask spread stays almost constant, yielding significant short-term profits. The results thus give an insight into the size and speed of the realization of an excess return for providing liquidity in a turbulent market.     

Is the Abnormal Post-IPO Underperformance Really Abnormal? The Evidence from CEE Emerging Markets

Using sorting procedures and cross-sectional tests, we investigate the long-run post-IPO performance and its sources in the Central and Eastern European (CEE) markets. We examine over 1100 stocks from 11 CEE countries for the period 2002–2014. We find that “old stocks” perform significantly better than “young stocks”, but only when the market beta is the sole risk factor considered. After accounting for the size and value effects, the IPO firms perform neither better nor worse than non-issuing companies. The sources of the initial low B/M ratios of debuting companies may lie in time-varying financial quality. The market newcomers are financially healthier than their older counterparts. However, over 2–5 years the fundamentals deteriorate and the financial standing regresses to the mean.     

The Effects of Stock Lending on Security Prices: An Experiment

We examine the impact of short selling by conducting a randomized stock lending experiment. Working with a large, anonymous money manager, we create an exogenous and sizeable shock to the supply of lendable shares by taking high loan fee stocks in the manager's portfolio and randomly making available and withholding stocks from the lending market. The experiment ran in two independent phases: the first, from September 5 to 18, 2008, with over $580 million of securities lent, and the second, from June 5 to September 30, 2009, with over $250 million of securities lent. While the supply shocks significantly reduce market lending fees and raise quantities, we find no evidence that returns, volatility, skewness, or bid–ask spreads are affected. The results provide novel evidence on the impact of shorting supply and do not indicate any adverse effects on stock prices from securities lending.     

Intra‐Dealer Integration

This paper examines the quotation behaviour of dealers who made markets in the same stocks on both NASDAQ and either EASDAQ or the LSE. Whereas previous studies examine international integration at the market level, we examine integration at the dealer level. In other words, do dealers within the same market‐making firm use information from their arm on the opposite side of the Atlantic in forming their own quotes? We find that while there is some evidence of integration at the market level, integration is hard to detect at the dealer level. The results are largely unaffected by differences in fungibility between our two samples.     

Tick Size,Spreads, and Liquidity: An Analysis of Nasdaq Securities Trading near Ten Dollars

Quoted and effective bid–ask spreads on Nasdaq are two to four cents per share narrower, ceteris paribus, when stocks trade with a smaller tick size below $10 per share. There is no evidence of a reduction in liquidity with the smaller tick size. The largest spread reductions occur for stocks whose market makers avoid odd-eighth quotes. This finding provides support for models implying that changes in the tick size can affect equilibrium spreads on a dealer market and indicates that the relation between tick size and market quality is more complex than the imposition of a constraint on minimum spread widths. Journal of Economic Literature Classification Numbers: G29, D34, N20.     

Minimum price variations, discrete bid-ask spreads, and quotation sizes

Exchange minimum price variation regulation's create discretebid-ask spreads. If the minimum quotable spread exceeds thespread that otherwise would be quoted, spreads will be wideand the number of shares offered at the bid and ask may be large.A cross-sectional discrete spread model is estimated by usingintraday stock quotation spread frequencies. The results areused to project 1/16 spread usage frequencies given a 1/16-tick.Projected changes in quotation sizes and in trade volumes areobtained from regression models. For stocks priced under 10,the models predict spreads would decrease 38 percent, quotationsizes would decrease 16 percent, and daily volume would increase34 percent.     

LIQUIDITY AND QUOTE CLUSTERING IN A MARKET WITH MULTIPLE TICK SIZES

We analyze market liquidity (i.e., spreads and depths) and quote clustering using data from the Kuala Lumpur Stock Exchange (KLSE), where the tick size increases with share price in a stepwise fashion. We find that stocks that are subject to larger mandatory tick sizes have wider spreads and less quote clustering. We also find that liquidity providers on the KLSE do not always quote larger depths for stocks with larger tick sizes. Overall, our results suggest that larger tick sizes for higher priced stocks are detrimental to market liquidity, although the adverse effect of larger tick sizes is mitigated by lower negotiation costs (i.e., less quote clustering).     

台湾证券柜台交易市场结构及其混合交易模式研究

台湾证券柜台交易市场在促进台湾中小型高科技企业的快速成长和规范非上市公开发行公司的股权报价转让等方面发挥着不可替代的重要作用。本文详细考察了台湾证券柜台交易市场上柜股票和兴柜股票的交易模式,研究表明兴柜市场实行的以分散报价、集中成交的竞争性做市商交易模式具有内在的制度优势,是适宜个人投资者为主的柜台交易市场。台湾柜台交易中心取得成功的关键在于,以满足柜台交易市场交易性需求、流动性需求、波动性需求和透明度需求为基础,通过构建合理的市场结构创造性地引入包括竞价交易机制在内、与市场功能和交易对象的风险特性相适应的混合交易模式。     

Sell on the news: Differences of opinion,short-sales constraints,and returns around earnings announcements

Miller [1977. Risk, uncertainty, and divergence of opinion. Journal of Finance 32, 1151–1168] hypothesizes that prices of stocks subject to high differences of opinion and short-sales constraints are biased upward. We expect earnings announcements to reduce differences of opinion among investors, and consequently, these announcements should reduce overvaluation. Using five distinct proxies for differences of opinion, we find that high differences of opinion stocks earn significantly lower returns around earnings announcements than low differences of opinion stocks. In addition, the returns on high differences of opinion stocks are more negative within the subsample of stocks that are most difficult for investors to sell short. These results are robust when we control for the size effect and the market-to-book effect and when we examine alternative explanations such as financial leverage, earnings announcement premium, post-earnings announcement drift, return momentum, and potential biases in analysts’ forecasts. Also consistent with Miller's theory, we find that stocks subject to high differences of opinion and more binding short-sales constraints have a price run-up just prior to earnings announcements that is followed by an even larger decline after the announcements.     

Shareholder investment horizons and the market for corporate control

This paper investigates how the investment horizon of a firm's institutional shareholders impacts the market for corporate control. We find that target firms with short-term shareholders are more likely to receive an acquisition bid but get lower premiums. This effect is robust and economically significant: Targets whose shareholders hold their stocks for less four months, one standard deviation away from the average holding period of 15 months, exhibit a lower premium by 3%. In addition, we find that bidder firms with short-term shareholders experience significantly worse abnormal returns around the merger announcement, as well as higher long-run underperformance. These findings suggest that firms held by short-term investors have a weaker bargaining position in acquisitions. Weaker monitoring from short-term shareholders could allow managers to proceed with value-reducing acquisitions or to bargain for personal benefits (e.g., job security, empire building) at the expense of shareholder returns.     

Against the tide: the commencement of short selling and margin trading in mainland China

China's recent removal of short‐selling and margin trading bans on selected stocks enables testing of the relative effect of margin trading and short selling. We find the prices of the shortable stocks decrease, on average, relative to peer A‐shares and cross‐listed H‐shares, suggesting that short selling dominates margin trading effects. Contrary to the regulators' intention and recent developed market empirical evidence, liquidity declines and bid‐ask spreads increase in these shortable stocks. Consistent with Ausubel (1990), these results imply that uninformed investors avoid the shortable stocks to reduce the risk of trading with informed investors.     

Does internalization diminish the impact of quote aggressiveness on dealer market share?

We analyze data provided by NASDAQ to examine how quote aggressiveness affects dealer market share and whether the practice of internalization mitigates the impact of quote aggressiveness. Our empirical results show that although internalization does not reduce the impact of price aggressiveness on dealer market share, it mitigates the impact of size aggressiveness. This result suggests that although internalization may not affect the dealer's incentive to post aggressive prices, it may reduce the incentive to post large depths. We find that aggressive quotes are more effective in raising dealer market share in stocks with a less competitive (more concentrated) market structure. Our results also show that the effective spread is wider (narrower) for stocks with a smaller price (size) elasticity of dealer market share.