Multimarket trading and liquidity: a transaction data analysis of Canada–US interlistings

We use transaction data for Toronto Stock Exchange (TSE) listed stocks to examine the impact on trading costs of the decision to interlist on a US exchange. We measure trading costs using both ‘posted’ bid-ask spreads and ‘effective’ bid-ask spreads that measure actual transaction prices relative to standing bid-ask quotes. After controlling for price level, trade size and trading volume effects, we find that overall posted and effective spreads in the domestic (TSE) market decrease subsequent to the interlisting. However, the decrease in trading costs is concentrated in those TSE stocks that experience a significant shift of total trading volume (TSE and US) to the US exchange after listing. We interpret this result in the context of theories of multimarket trading as a competitive response by TSE market makers to the additional presence of US market makers.     

Market structure and bid-ask spreads: IBIS vs Nasdaq

A comparison is made between the bid-ask spreads of 30 high volume German stocks traded on IBIS and 30 high volume US stocks traded on Nasdaq. IBIS and Nasdaq are best described as agency and dealer auction markets, respectively. On average, the market spread for these IBIS and Nasdaq stocks is the same, but for the 10 most active stocks in each market, IBIS spreads are considerably lower. For these latter stocks, IBIS spreads change in a predictable manner throughout the day. Nasdaq spreads do not. The critical factor appears to be the unrestricted access of suppliers of immediacy that is distinctive for agency auction markets.     

Liquidity of the CBOE Equity Options

We examine the CBOE option market depth and bid-ask spreads. Absence of price effects surrounding large option trades suggests excellent market depth. However, bid-ask spreads for the CBOE options and the NYSE stocks are nearly equal, even though an average option is equivalent to less than half a stock plus borrowing. We explain this tradeoff between market depth and bid-ask spreads on the CBOE and the NYSE by differences in market mechanisms. We also show that the adverse-selection component of the option spread, which measures the extent of information-related trading on the CBOE, is very small.     

Market-Making in the Third Market for NYSE-Listed Securities

This paper empirically examines market making in the third market for common stocks that are listed on the NYSE. Although the same non-NYSE members make a market on both types of stocks, bid-ask spreads are wider on Rule 19c-3 stocks than on Rule 390 stocks. Market-making by NYSE members is minimal and spreads posted by NYSE members are wider than those posted on identical stocks by non-NYSE members. This suggests that NYSE members do not compete on the basis of spread but use methods such as price matching and the internalization of orders to attract order flow to the third market.     

Portfolio risk,adjustment costs,and security dealers' bid/ask spreads

This article notes that dealers' bid/ask spreads should vary directly with their costs of adjusting to inventory imbalances. Thus, well-diversified dealers are expected to quote lower bid/ask spreads on stocks with substantial total risk caused by undiversifiable risk. Furthermore, the effect of systematic risk on bid/ask spreads should be negligible if dealers are compensated for systematic risk by market returns. This article shows that, empirically, bid/ask spreads of OTC stocks are insensitive to the systematic risk of individual stocks—even when only stocks with stable betas are considered. Furthermore, bid/ask spreads are not sensitive to changes in market variance, as would be expected if systematic risk affected spreads. While unsystematic risk affects bid/ask spreads, its effect is pronounced for stocks traded by small, undiversified dealers. If stocks are only traded by large dealers with low diversification costs, unsystematic risk does not affect bid/ask spreads.     

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.     

Analysis of REIT IPOs Using a Market Microstructure Approach: Anomalous Behavior or Asset Structure

In this research, we examine and present new evidence on the market activity following the initial public offering (IPO) of a real estate investment trust (REIT) using microstructure data. We analyze the bid-ask spread differences for REIT securities compared to common stocks and closed-end funds for all IPOs between 1985 and 1988. Our results show that REITs, as a whole sample, experience significantly greater bid-ask spreads immediately following the IPO compared to common stocks and funds. However, this outcome is driven by the equity REIT sample, with the mortgage REIT sample having significantly smaller bid-ask spreads. This is in contrast to the evidence documented by Nelling, Mahoney, Hildebrand, and Goldstein (1995). We attribute our result to the underlying asset structure (such as equity, hybrid, and mortgage portfolios) of the various REITs. Overall, however, we find that bid-ask spreads for REITs are similar to those of common stock when both asset structure and the traditional determinants of the spread (share price, trade volume, and returns variance) are considered.     

Transactions Costs and Holding Periods for Common Stocks

Amihud and Mendelson (1986) and Constantinides (1986) provide a theoretical basis for the proposition that assets with higher transactions costs are held by investors for longer holding periods, and vice versa. We examine average holding periods and bid-ask spreads for Nasdaq stocks from 1983 through 1991 and for New York Stock Exchange (NYSE) stocks from 1975 through 1989 and find strong evidence that, as predicted, the length of investors' holding periods is related to bid-ask spreads. We also find that the relation between holding periods and bid-ask spreads is much stronger on Nasdaq, where spreads are larger, than on the NYSE, where spreads are smaller.     

The Riskiness of REITs Surrounding the October 1997 Stock Market Decline

Real estate investment trusts (REITs) are viewed as low risk/low return stocks that exhibit defensive stock characteristics. The stock market decline of October 1997 provides an excellent opportunity to examine the riskiness of REITs during high levels of market uncertainty. We find that the decline in REIT stock values was about one-half as large as the decline of non-REIT stocks. Additionally, market uncertainty on the event day was shown with an increased bid-ask spread for all stocks. On the following day when the market decline was partially reversed, the bid-ask spreads continued to increase for non-REIT stocks, but declined for REIT stocks. This suggests that REITs, like defensive stocks in general, are less prone to significant declines during market-wide disturbances. Also, we order stocks based on the standard deviation measures of risk and show that this risk measure explains the cross-section of returns for non-REITs but is not valid for REITs.     

Seasonalities in NYSE Bid-Ask Spreads and Stock Returns in January

Using end-of-month bid-ask spreads for 540 NYSE stocks over the period 1982–1987, we document a seasonal pattern in which both relative and absolute spreads decline from the end of December to the end of the following January. Cross-sectional regressions do not, however, provide evidence of a significant correlation between changes in spreads at the turn of the year and January stock returns. Either there is no cause and effect relation between the coincidental seasonals in bid-ask spreads and January returns for NYSE stocks or the data are too “noisy” to reveal any relation.     

THE RELATIONSHIP BETWEEN OTC BID-ASK SPREADS AND DEALER SIZE: THE IMPACT OF ORDER-PROCESSING AND DIVERSIFICATION COSTS

The effects of large transactions on OTC security dealers' bid-ask spreads are analyzed for stocks with different price levels. Because overhead expenses vary little with the value of transactions, economies of scale exist for dealers in higher-priced stocks. Thus, percentage bid-ask spreads decline with the price level of the stock. However, larger transactions entail larger order-clearing and inventory-adjustment costs. These costs may be particularly burdensome for smaller dealers with limited purchasing powers and abilities to diversify inexpensively. Consequently, smaller dealers charge higher spreads for trading high-priced stocks.     

Insider Trading and the Bid-Ask Spread

This study examines the intertemporal and cross-sectional association between the bid-ask spread and insider trading. Empirical results from the cross-sectional regression analysis reveal that market makers establish larger spreads for stocks with a greater extent of insider trading. The time-series regression analysis, however, finds no evidence of spread changes on insider trading days. These results suggest that although market makers may not be able to detect insider trading when it occurs, they protect themselves by maintaining larger spreads for stocks with a greater tendency of insider trading. The results also reveal that market makers establish larger spreads when there are unusually large transactions. In addition, this study finds that spreads are positively associated with risk and negatively with trading volume, the number of exchange listings, share price, and firm size.     

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.     

THE DEALER AND MARKET CONCEPTS OF BID-ASK SPREAD: A COMPARISON FOR NASDAQ STOCKS

Two models of bid-ask spread are estimated with a unique sample of matched observations of dealer spreads and market (inside) spreads for NASDAQ stocks. The estimates demonstrate that dealer and market spreads relate differently to their common determinants, indicating that the two measures are not interchangeable. Consequently, studies must select the spread concept that is appropriate to the hypothesis being tested to get unbiased estimates and correct interpretations of model parameters. In particular, the cost of immediacy to investors is measured directly by market spreads, while market-making costs and interdealer competition relate directly to dealer spreads.     

When machines read the news: Using automated text analytics to quantify high frequency news-implied market reactions

We examine high-frequency market reactions to an intraday stock-specific news flow. Using unique pre-processed data from an automated news analytics tool based on linguistic pattern recognition we exploit information on the indicated relevance, novelty and direction of company-specific news. Employing a high-frequency VAR model based on 20 s data of a cross-section of stocks traded at the London Stock Exchange we find distinct responses in returns, volatility, trading volumes and bid-ask spreads due to news arrivals. We show that a classification of news according to indicated relevance is crucial to filter out noise and to identify significant effects. Moreover, sentiment indicators have predictability for future price trends though the profitability of news-implied trading is deteriorated by increased bid-ask spreads.     

Forecasting liquidity-adjusted intraday Value-at-Risk with vine copulas

We propose to model the joint distribution of bid-ask spreads and log returns of a stock portfolio by using Autoregressive Conditional Double Poisson and GARCH processes for the marginals and vine copulas for the dependence structure. By estimating the joint multivariate distribution of both returns and bid-ask spreads from intraday data, we incorporate the measurement of commonalities in liquidity and comovements of stocks and bid-ask spreads into the forecasting of three types of liquidity-adjusted intraday Value-at-Risk (L-IVaR). In a preliminary analysis, we document strong extreme comovements in liquidity and strong tail dependence between bid-ask spreads and log returns across the firms in our sample thus motivating our use of a vine copula model. Furthermore, the backtesting results for the L-IVaR of a portfolio consisting of five stocks listed on the NASDAQ show that the proposed models perform well in forecasting liquidity-adjusted intraday portfolio profits and losses.     

Non-scheduled news arrival and high-frequency stock market dynamics: Evidence from the Australian Securities Exchange

An increasing number of market participants utilise news analytics software to comprehend the large amounts of unstructured data flowing through news-wires. Utilising original data from one such tool – Ravenpack – I examine the market reaction of leading Australian stocks to stock-specific news flow over an extended period. Unconditional analysis of key variables around 484,440 news items reveals distinct responses in market activity, volatility, bid-ask spreads and returns. The study confirms previous literature such that indicated relevance of news items is critical when identifying significant effects. In addition, the reaction of market activity, volatility and spreads is greatest for negative news. The findings are confirmed when controlling for market dynamics and cross-dependencies between variables in a high-frequency VAR model.     

Information Asymmetry Around Earnings Announcements

This study examines bid-ask spreads to determine how the anticipation and release of earnings announcements affect information asymmetry in the stock market. I use regression analysis and find that bid-ask spreads are negatively related to public information availability and positively related to earnings variability and the market reaction to prior unexpected earnings. The results suggest that firms for which earnings is expected to yield a relatively larger stock market reaction have greater information asymmetry than firms for which earnings are expected to yield a smaller market reaction.I also find that bid-ask spreads gradually increase in the four days prior to earnings announcements, and increase sharply the day prior to, the day of and the day after the earnings announcements. Bid-ask spreads seven to ten days after earnings announcements are not significantly different from bid-ask spreads seven to ten days prior to earnings announcements.     

Market microstructure of the Pink Sheets

We study the microstructure of the Pink Sheets and assess the ability of existing theory to capture salient features of this relatively unstructured and unregulated market. Clustering patterns in quotes, quoted spreads, and trade prices indicate that market participants have selected price-dependent tick sizes for different stocks. Clustering intensity varies across stocks as a function of proxies for information availability. Similarly, the bid-ask spread varies as a function of volatility and liquidity. These results suggest (1) microstructure research has established robust predictions of market attributes and (2) unstructured markets are able to develop at least some effective behavioral norms endogenously.     

WINNERS AND LOSERS ON NYSE: A RE-EXAMINATION USING DAILY CLOSING BID-ASK SPREADS

We study a sample of NYSE stocks that experienced a large one-day price change during 1992 and were reported as daily largest percentage gainers and largest percentage losers in the Wall Street Journal. The sample indicates significant reversals during the immediate post-announcement period. We test for market efficiency by using bid-ask spreads obtained from the transactions data for the days immediately after the announcement. The overall results indicate that the returns during the reversal period are less than the average bid-ask spread during the same time. We also find that major losers, firms with ?20 percent to ?50 percent event-date abnormal returns, experience price reversals generating returns that are significantly greater than the average bid-ask spread during that period. We interpret this result as consistent with the overreaction hypothesis. A test of a trading rule to exploit this overreaction is not profitable, providing support for weak-form market efficiency.