Stock repurchases and treasury share sales: Do they stabilize price and enhance liquidity?

Can companies reduce the volatility and increase the liquidity of their stocks by trading them? In the context of the Italian stock market, where companies have far more leeway to sell as well as buy their own stocks than in the U.S., the answer is yes. We examine the effects of trading (open-market share repurchases and treasury shares sales) on liquidity (bid-ask spread) and volatility (return variance). Further, we examine the impact of shareholder approvals of repurchase programs on liquidity and volatility. We find clear evidence that trading increases liquidity and reduces volatility. These results are consistent with our analysis of the motives Italian companies give for making share repurchases.     

Commonality in liquidity and multilateral trading facilities

We use the introduction of two multilateral trading facilities (MTFs) to examine the impact of market fragmentation on commonality in liquidity. We find that the introduction of MTFs following the Markets in Financial Instruments Directive increases the comovement of stocks’ liquidity with MTF liquidity, while the comovement with the home market liquidity generally decreases. We also find that the higher the MTF trading volume or the number of MTFs trading a stock, the stronger the effect. Further, we find that the commonality in liquidity remains unchanged for a matched control sample of stocks that do not trade on MTFs.     

How do designated market makers create value for small-caps?

A poor liquidity level and a high liquidity risk significantly raise the required return for small-cap stocks. Euronext allows these firms to hire designated market makers (DMMs) who guarantee a minimum liquidity supply for a lump sum annual fee. In an event study based on 74 DMM stocks, we find that the contract improves liquidity level, reduces liquidity risk, and generates an average abnormal return of 3.5%. DMMs participate in more trades and incur a trading loss on high quoted-spread days (days when their constraint is likely to bind). Finally, DMMs reduce the size of pricing errors.     

Information costs and liquidity effects from changes in the FTSE 100 list

Abstract

In this paper we examine the stock price effect of changes in the composition of the FTSE 100 over the time period of 1984–2001. Like the S&P 500 listing studies, we find that the price and trading volume of newly listed firms increases. The evidence is consistent with the information cost/liquidity explanation. This is because investors hold stocks with more available information, implying that they have lower trading costs. This explains the increase in the stock price and trading volume of newly listed stocks to the FTSE 100 List. We find the reverse effect for the deletions from the FTSE 100.     

Short Selling and the Weekend Effect in Nasdaq Stock Returns

We examine daily short selling of Nasdaq stocks to explore whether speculative short selling causes a significant portion of the weekend effect in returns. We identify a weekend effect in speculative short selling whereby it constitutes a larger percentage of trading volume on Mondays versus Fridays. We find an opposite effect in dealer short selling, consistent with market makers adding liquidity and stability. Our main finding is that speculative short selling does not explain an economically meaningful portion of the weekend effect in returns, even among the firms most that are most actively shorted. This finding contradicts some prior studies.     

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 high-frequency trading actually improve market liquidity? A comparative study for selected models and measures

The increasing volume of messages sent to the exchange by algorithmic traders stimulates a fierce debate among academics and practitioners on the impacts of high-frequency trading (HFT) on capital markets. By comparing a variety of regression models that associate various measures of market liquidity with measures of high-frequency activity on the same dataset, we find that for some models the increase in high-frequency activity improves market liquidity, but for others, we get the opposite effect. We indicate that this ambiguity does not depend only on the stock market or the data period, but also on the used HFT measure: the increase of high-frequency orders leads to lower market liquidity whereas the increase in high-frequency trades improves liquidity. We hypothesize that the observed decrease in market liquidity associated with an increasing level of high-frequency orders is caused by a rise in quote volatility.     

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.     

Determinants of Trading Profits: The Liquidity Provision Decision

Theories show that liquidity provision implies negative contemporaneous correlation between trades and returns. Dealers on the Taiwan Stock Exchange are granted typical dealer trading advantages without obligations to provide liquidity and, thus, are ideal to test whether these advantages lead to voluntary liquidity provision (earning bid-ask spreads) or information trading (trading in the direction of the market). We find a strong positive correlation in aggregate, implying that these unrestricted dealers prefer information trading. We also find that smaller dealers are more likely to provide liquidity and that small-cap stocks (with larger bid-ask spreads) are more profitable for liquidity provision.     

Market makers as information providers: The natural experiment of STAR

Market makers are financial intermediaries who are supposed to provide additional liquidity, but do not have any information-related obligation. This paper studies the unique case of the Italian Stock Exchange, where market makers are also obliged to facilitate information disclosure about the firms they cover. We focus on a group of small/medium capitalization stocks (STAR) that are assigned a designated market maker (DMM) starting from 2001. We show that their liquidity requirements are not binding during the sample periods and that the main impact of DMMs' introduction is due to their obligations on information provision. We find that DMMs' activity as information providers reduces spread and price volatility, the probability of informed trading (PIN), and the adverse selection component of the spread. An event study provides evidence that the information released through DMMs is perceived as useful by market participants.     

Market Response to Liquidity Improvements: Evidence from Exchange Listings

The study examines a sample of 895 stocks that moved from Nasdaq to the New York Stock Exchange or to the American Stock Exchange (Amex) between 1971 and 1994. We show how various measures of liquidity such as the bid‐ask spread, trading volume, and stock price precision improve in somewhat different ways upon transfer to NYSE (Amex). We also find that reductions in trading costs (percentage spread) and in pricing error volatility (Hasbrouck's σ₅) can explain most of stock market's positive response to exchange listing. Thus, liquidity has many facets and cannot be represented by the bid‐ask spread alone.     

Short-selling,margin-trading,and stock liquidity: Evidence from the Chinese stock markets

This paper examines the impacts of two forms of leveraged trading—margin trading and short selling—on the trading liquidity of individual stocks in China. We find that trading liquidity for relevant stocks generally improves after restrictions on leveraged trading are removed. However, margin trading and short selling have opposite impacts on liquidity. During ordinary periods, margin trading benefits liquidity, whereas short selling damages liquidity; however, during market downturns, their roles are reversed. We also provide evidence suggesting that short sellers are informed traders in China and that short selling reduces stock liquidity because of the increased risk of adverse selection faced by uninformed traders.     

Reputation Effects in Trading on the New York Stock Exchange

Theory suggests that reputations allow nonanonymous markets to attenuate adverse selection in trading. We identify instances in which New York Stock Exchange (NYSE) stocks experience trading floor relocations. Although specialists follow the stocks to their new locations, most brokers do not. We find a discernable increase in liquidity costs around a stock's relocation that is larger for stocks with higher adverse selection and greater broker turnover. We also find that floor brokers relocating with the stock obtain lower trading costs than brokers not moving and brokers beginning trading post‐move. Our results suggest that reputation plays an important role in the NYSE's liquidity provision process.     

Empirical Evidence on the Role of Trading Suspensions in Disseminating New Information to the Capital Market

Abstract:  This paper examines the effect of temporarily suspending the trading of exchange-listed individual stocks. We evaluate whether regulatory authorities can successfully use the mechanism of trading suspension in forcing companies to disclose new and material information to the capital market. Previous studies on trading suspensions mainly concentrate on North-American stock markets and find conflicting results. This study utilizes a new data set comprising of firms listed on Euronext Brussels – an important segment of Europe's leading cross-border exchange. Our results show that suspension is indeed an effective means of disseminating new information. Stock prices adjust completely and instantaneously to the new information released during trading suspensions. We also observe a significant increase in trading volume with the reinstatement of trading. On the other hand, we do not find support for the claim that trading suspensions increase the volatility of stock prices. Overall, our results show the efficacy of trading suspensions in disseminating new information.     

The market liquidity of DIAMONDS,Q's,and their underlying stocks

We investigate the market liquidity effects of the introduction of index-tracking stocks for the Dow Jones Industrial Average (DIAMONDS) and the NASDAQ 100 index (Q's). Our main finding is liquidity of the underlying DJIA 30 index stocks improves after the introduction of the exchange-traded fund, largely because of a decline in the cost of informed trading. Further, we find the DIAMONDS has significantly lower liquidity costs over the first 50 days of trading as compared to the portfolio of its component stocks, again primarily because of lower adverse selection costs. Finally, we find weaker but qualitatively similar results for the Q's.     

全球股票市场交易费用变动趋势研究

各国证券交易所为提高市场质量和增强国际竞争力,进行了股票市场交易费用结构与费率的频繁调整。本文首先总结了美国、英国、日本、香港等国家和地区交易所现行交易费用的结构特征,并以纽约证券交易所和伦敦证券交易所为案例估算了交易费率的调整比率。其次,本文运用2002年至2010年期间主要海外证券交易所的财务数据和市场数据,分析交易费用变动与交易所经营业绩的互动关系。最后,我们对欧美市场交易费用的大幅下调进行了成因分析,并探讨我国证券交易所内外部环境及经营特点与海外市场存在的差异,提出相关启示和思考。     

Analyst coverage: Does the listing location really matter?

Using a count panel regression method, we find that the listing location really does matter as stocks listed on the main board (FTSE350) rather than the junior market (AIM) attract more analyst coverage than can be explained by existing factors, even when we control for listing requirements and the type of cross-listing. We also find that listing requirements have a significantly greater impact on the number of analysts following AIM companies rather than their FTSE350 counterparts. Moreover, pooling stocks from different listing locations can conceal additional differences in the determinates of analyst services for the main board and junior markets. For example, cross-listing on a stock exchange increases analysts coverage for FTSE350 stocks but not AIM stocks and listing on less transparent trading venues such as over the counter and alternative trading systems (dark pools) decreases analyst coverage, especially for AIM stocks.     

Does Trading Volume Contain Information to Predict Stock Returns? Evidence from China's Stock Markets

This paper examines empirical contemporaneous and causal relationships between trading volume, stock returns and return volatility in China's four stock exchanges and across these markets. We find that trading volume does not Granger-cause stock market returns on each of the markets. As for the cross-market causal relationship in China's stock markets, there is evidence of a feedback relationship in returns between Shanghai A and Shenzhen B stocks, and between Shanghai B and Shenzhen B stocks. Shanghai B return helps predict the return of Shenzhen A stocks. Shanghai A volume Granger-causes return of Shenzhen B. Shenzhen B volume helps predict the return of Shanghai B stocks. This paper also investigates the causal relationship among these three variables between China's stock markets and the US stock market and between China and Hong Kong. We find that US return helps predict returns of Shanghai A and Shanghai B stocks. US and Hong Kong volumes do not Granger-cause either return or volatility in China's stock markets. In short, information contained in returns, volatility, and volume from financial markets in the US and Hong Kong has very weak predictive power for Chinese financial market variables.     

The Effect of Option Listing on Bid-Ask Spreads,Price Volatility,and Trading Activity of the Underlying OTC Stocks

This paper examines the changes in spreads, price volatility, and trading activity surrounding option listing for a sample of 144 OTC stocks. For this sample, both price volatility and volume increase, but the evidence on spreads is mixed. The increase in price volatility is attributed primarily to an increase in residual return variances. Furthermore, price volatility increases even after controlling for volume, insider trading, and spreads. Although these variables do not fully explain the causes for the increase in price volatility after option listing, the results suggest that liquidity trading or volume has a stronger effect on price volatility than insider trading. This study also finds that both the number of trades and institutional holdings show substantial increases, which are supportive of the notion that listing of options on OTC stocks attracts more attention.     

Liquidity Commonality in the London Stock Exchange

Abstract:  A number of events such as the international market crash of October 1987 and the 1997 East Asian crisis show that individual firm liquidity is affected by market-wide factors. However, research in systematic liquidity is still at an embryonic stage and given the gap in the literature, the paper offers first time evidence (to the best of our knowledge) on the presence of systematic liquidity in the UK using FTSE100 and FTSE250 stocks. The unique setting of the London Stock Exchange as regards changes in trading regimes, allows an original answer as to whether changes in the nature of market making from obligatory to non-obligatory, affect commonality in liquidity. Results indicate that commonality is quite strong for FTSE100 stocks at individual and portfolio level, while for the FTSE250 it is strong only at portfolio level. Overall commonality is on average similar across trading regimes, irrespective of the nature of the provision of liquidity.