DAY‐END EFFECT ON THE PARIS BOURSE

We study the day‐end effect on the Paris Bourse, a computerized order‐driven market with competing dealers. The day‐end return is approximately double the magnitude found in U.S. data and is nearly four times larger for stocks trading with a registered dealer. However, this is largely explained by the time between trades and the bid‐ask spread. Unlike the U.S. data, the effect does not decline as stock price increases, probably because of a variable tick size in the Paris market. Finally, a change to a closing call auction in May 1996 for a subset of stocks did not reduce the day‐end effect.     

Automated Versus Floor Trading: An Analysis of Execution Costs on the Paris and New York Exchanges

A global trend towards automated trading systems raises the important question of whether execution costs are, in fact, lower than on trading floors. This paper compares the trade execution costs of similar stocks in an automated trading structure (Paris Bourse) and a floor-based trading structure (NYSE). Results indicate that execution costs are higher in Paris than in New York after controlling for differences in adverse selection, relative tick size, and economic attributes across samples. These results suggest that the present form of the automated trading system may not be able to fully replicate the benefits of human intermediation on a trading floor.     

Liquidity provision with limit orders and a strategic specialist

This article presents a microstructure model of liquidity provisionin which a specialist with market power competes against a competitivelimit order book. General solutions, comparative statics andexamples are provided first with un-informative orders and thenwhen order flows are informative. The model is also used toaddress two optimal market design issues. The first is the effectof 'tick' size - for example, eighths versus decimal pricing- on market liquidity. Institutions trading large blocks havea larger optimal tick size than small retail investors, butboth prefer a tick size strictly greater than zero. Second,a hybrid specialist/limit order market (like the NYSE) providesbetter liquidity to small retail and institutional trades, buta pure limit order market (like the Paris Bourse) may offerbetter liquidity on mid-size orders.     

Earnings Announcements, Asymmetric Information, Trades and Quotes

This paper empirically analyses trades and quotes around the times of 37 earnings announcements in the Paris Bourse. We find that trading volume is larger on announcement days, spreads are wider after announcements, and the permanent positive (resp. negative) price impact of purchases (sales) is greater around announcements. While the findings pertaining to the spread and the permanent impact of trades are consistent with the view that earnings announcements correspond to an increase in information asymmetries, the result that trading volume is larger suggests that other effects are at work.     

The effect of a closing call auction on market quality and trading strategies

We study the effects of the introduction of a closing auction (CA) on the microstructure on the continuous trading phase in Borsa Italiana and Paris Bourse. We postulate and compare several empirical predictions based on both standard Kyle-type models and more recent models of limit order book. We find that while the CA has no effect during most of the day, its effect on the last minutes of trading is dramatic. We document a sharp decline in volume, associated with a significant reduction in spread and volatility, and an increase in aggressiveness of liquidity suppliers during the last minutes. We show that the differences in the Reference Price algorithm between Milan and Paris have a significant effect: the CA attracts greater volumes when the Reference Price is equated to the CA price.     

Intra-day market activity

This paper presents a study of intra-day patterns of stock market activity and introduces duration based activity measures for single stocks and multiple assets. The proposed measures involve weighted durations, i.e. times necessary to sell (buy) a predetermined volume or value of stocks. As such, they capture dependencies between intra-trade durations, transaction volumes and prices, and can be interpreted as liquidity measures. This approach allows us to highlight the intra-day variations of liquidity, its costs and volatility, and to develop a liquidity based asset ordering. The extension to a multivariate analysis yields new insights into the dynamics of portfolio liquidity by revealing various aspects of asset substitution, including the effects of correlated trade intensities of portfolio components. Several examples are used to show that in practice, the proposed liquidity measures become efficient instruments for strategic block trading and optimal portfolio adjustments. The paper also contains an empirical study of asset activity on the Paris Bourse. We examine the liquidity dynamics throughout the day and reveal the existence of periodic patterns resulting from world-wide interactions of major stock markets. In the multivariate setup, we report evidence on common patterns and correlations of trade intensities of selected stocks.     

The manipulation of closing prices

Before the introduction of a call auction at the close, the last minute of trading at the Paris Bourse was the most active of the whole day. Even though the bid–ask spread increased substantially, the probability of large and aggressive orders increased, as did price volatility. In addition, both the one-minute returns and the proportion of partially hidden orders increased. In this paper, we develop an agency-based model of closing price manipulation, which can account for these phenomena. In addition, we discuss the optimal closing price mechanism under manipulation.     

Liquidity costs: Screen-based trading versus open outcry

The results reported in this paper challenge the popular belief that screen-based trading offered lower liquidity costs than the open-outcry approach during its first year of side-by-side operation in the U.S. financial derivatives market. Using time and sales data from the Chicago Board of Trade (CBOT) market profile data series, effective bid-ask spreads are estimated on the basis of daily and intraday measures of the Thompson-Waller and Smith-Whaley estimators. We find liquidity costs on the screen-based system vary with time and the level of floor trading activity. In particular, a one-tick market is observed just before the opening of the Chicago trading floor (6:30 to 7:30 am). However, subsequent intraday spreads exhibit the familiar “reverse J-shaped pattern”—highest following the opening of floor trading, declining until afternoon, and then increasing until close. Meanwhile, daily spread estimates average almost a quarter-tick higher on the screen-based market relative to the one-tick spread commonly associated with open outcry. This relationship remained robust across sample time-series and conservative price-change specifications. Since the study was conducted, electronic trading has become the predominant exchange medium for financial derivatives at the CBOT, following the example set in Europe's traditional futures exchanges, e.g. France's Matif, Germany's Deutsche Bourse and the U.K.'s Liffe.     

Short Sales Constraints, Liquidity and Price Discovery: An Empirical Analysis on the Paris Bourse

In the Paris Bourse some stocks are traded on a spot basis, while others are traded on a monthly settlement basis. The latter are likely to be less subject to leverage and short sales constraints. We empirically analyse the consequences of this difference for the order flow and the return process. Consistent with the theoretical analysis of Diamond and Verrechia (1987), we find that market sell orders are less frequent on the spot market than on the monthly settlement market (although not very significantly) and that the spot market reflects good news (significantly) faster than bad news.     

Liquidity in auction and specialist market structures: Evidence from the Italian bourse

Several studies find that bid-ask spreads for stocks listed on the NYSE are lower than for stocks listed on NASDAQ. While this suggests that specialist market structures provide greater liquidity than competing dealer markets, the nature of trading on the NYSE, which comprises a specialist competing with limit order flow, obfuscates the comparison. In 2001, a structural change was implemented on the Italian Bourse. Many stocks that traded in an auction market switched to a specialist market, where the specialist controls order flow. Results confirm that liquidity is significantly improved when stocks commence trading in the specialist market. Analysis of the components of the bid-ask spread reveal that the adverse selection component of the spread is significantly reduced. This evidence suggests that specialist market structures provide greater liquidity to market participants.