Stock Splits and Liquidity: The Case of the Nasdaq-100 Index Tracking Stock

In an attempt to disentangle the signaling effect from the liquidity effect of stock splits, I examine the liquidity changes following the two‐for‐one split of the Nasdaq‐100 Index Tracking Stock. Since there can be no signaling with an index stock split, any difference between pre‐ and postsplit trading may be driven by liquidity but not signaling effects. I find that though the postsplit relative bid‐ask spread is higher and daily turnover is unchanged, the frequency, share volume, and dollar‐volume of small trades all increased after the split, indicating that the split improved liquidity for small trade‐sizes.     

Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality

Facing increased competition over the last decade, many stock exchanges changed their trading fees to maker‐taker pricing, an incentive scheme that rewards liquidity suppliers and charges liquidity demanders. Using a change in trading fees on the Toronto Stock Exchange, we study whether and why the breakdown of trading fees between liquidity demanders and suppliers matters. Posted quotes adjust after the change in fee composition, but the transaction costs for liquidity demanders remain unaffected once fees are taken into account. However, as posted bid‐ask spreads decline, traders (particularly retail) use aggressive orders more frequently, and adverse selection costs decrease.     

Stock splits in a retail dominant order driven market

This paper uses intraday and daily data from the Stock Exchange of Thailand (SET) between 2002 and 2004 to provide evidence that firms use stock splits to bring their stock prices down to a preferred trading range of their clientele base. Stock splits reduce bid–ask spreads and intraday and daily price impact while increasing depths supplied by retail investors who account for 60–70% of trading on the SET. Firms that choose a high split factor experience greater improvement in liquidity. The study finds no evidence that split announcements are used to signal post-split earnings performance.     

The Components of the Bid‐Ask Spread: the Case of the Athens Stock Exchange

We analyse the components of the bid‐ask spread in the Athens Stock Exchange (ASE), which was recently characterised as a developed market. For large and medium capitalisation stocks, we estimate the adverse selection and the order handling component of the spreads as well as the probability of a trade continuation on the same side of either the bid or the ask price, using the Madhavan et al. (1997) model. We extend it by incorporating the traded volume and we find that the adverse selection component exhibits U‐shape patterns, while the cost component pattern depends on the stock price. For high priced stocks, the usual U‐shape applies, while for low‐priced ones, it is an increasing function of time, mainly due to the order handling spread component. Furthermore, the expected price change and the liquidity adjustment to Value‐at‐Risk that is needed are higher in the low capitalisation stocks, while the most liquid stocks are the high priced ones. Moreover, by estimating the Madhavan et al. (1997) model for two distinct periods we explain why there are differences in the components of the bid‐ask spread.     

The Effect of Crossing‐Network Trading on Dealer Market's Bid‐Ask Spreads

This article provides new insights into market competition between traditional exchanges and alternative trading systems in Europe. It investigates the relationship between the trading activity of a crossing network (CN) and the liquidity of a traditional dealer market (DM) by comparing data from the SEAQ quote‐driven segment of the London Stock Exchange (LSE) and internal data from the POSIT crossing network. A cross‐sectional analysis of bid‐ask spreads shows that DM spreads are negatively related to CN executions. Risk‐sharing benefits from CN trading dominate fragmentation and cream‐skimming costs. Further, risk‐sharing gains are found to be related to dealer trading in the CN.     

The impact of tick size on intraday stock price behavior: evidence from the Taiwan Stock Exchange

This research examines the impact of tick size on intraday stock price behavior for stocks listed on the Taiwan Stock Exchange over the 2-year period of 1998–1999. The sample involves the same 80 firms that trade under the tick size of (New Taiwan Dollars) NT$0.1 and NT$0.5, respectively. The sample firms display a U-shaped intraday pattern of bid–ask spread, volatility, autocorrelation, and trading volume. The empirical results indicate that a larger tick size is associated with a wider bid–ask spread, larger volatility, and more negative autocorrelation. Moreover, a larger tick size is associated with a higher percentage increase of bid–ask spread and volatility in the middle of the trading period. Finally, the effect of tick size on trading volume is insignificant.     

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.     

Explaining the intra-day variation in the bid–ask spread in competitive dealership markets – A research note

There are many possible explanations for variation in the inside bid–ask spread during the trading day, including informed trading, price inelastic market demand, price discovery, statistical artefact and market concentration. Each of these explanations is examined for consistency with respect to both the inside and average bid–ask spread, observed both inside and outside the mandatory quote period in the London Stock Exchange.     

EVIDENCE ON THE BEHAVIOR OF BID AND ASK PRICES AT THE TURN OF THE YEAR: IMPLICATIONS FOR THE SURVIVAL OF STOCK RETURN SEASONALITY

We analyze changes at the turn of the year in the relative and standardized bid-ask spreads of New York Stock Exchange stocks before and after the introduction of personal income taxes in 1917. Previous research indicates the return seasonal arose in 1917. Here, we investigate when spread seasonals arose and whether spread changes are cross-sectionally correlated with the return seasonal. The results indicate that the year-end selling pressure, which began in 1917, is apparent as downward shifts in the stocks' bid and ask prices rather than as widening spreads. Additional evidence suggests the January return seasonal originated as compensation to specialists, as well as to competing traders, for incurring the costs of providing liquidity during the tax-induced seasonal trading pattern.     

Explaining Monday Returns

The Monday effect is reexamined using two stock indexes and a sample of 452 individual stocks that trade on the London Stock Exchange. The results based on conventional test methods reveal a negative average return on Monday. Extending the analysis to examine the effects of various possible influences simultaneously, the average Monday return becomes positive and does not differ significantly from the average returns of most other days of the week. Fortnight, ex‐dividend day, account period, (bad) news flow, trading activity, and bid‐ask spread effects are all controlled for. The results broadly support the trading time hypothesis.     

Political Risk and Foreigners' Trading: Evidence from an Emerging Stock Market

This paper analyzes the impact of political risk on foreign investors' trading in emerging stock markets, market-wide and for industry portfolios, using quantified political risk ratings reported in the International Country Risk Guide and foreign flows data compiled by the Istanbul Stock Exchange. We also track the differential effect of political risk upgrades and downgrades. Political risk is shown to affect stock returns, net foreign flows, and macroeconomic variables. Foreigners' reaction to upgrades (downgrades) is slow (immediate) and smaller in magnitude. Foreigners' reaction to political risk varies with industry's sensitivity to market risk, except for the tourism sector, where their response is particularly salient. Local investors appear to provide liquidity to foreigners, who respond to information.     

Closing call auctions and liquidity

The present paper examines the impact of closing call auctions on liquidity. It exploits the natural experiment offered by the introduction of a closing call auction on the Australian Stock Exchange on 10 February 1997. The introduction of the closing call auction is associated with a reduction in trading volume at the close of continuous trading. However, bid‐ask spreads during continuous trading are largely unaffected by the introduction of the closing call auction. Therefore, closing call auctions consolidate liquidity at a single point in time without having any adverse effect on the cost of trading.     

Do aggressive orders affect liquidity? An evidence from an emerging market

This paper investigates how aggressive orders affect spreads and trading activity measures on the stock market. Based on a sample of stocks listed on the Warsaw Stock Exchange this study finds that spreads and trading activity measures increase significantly when aggressive orders are executed, but quickly revert to initial levels. The reaction to these orders on the bid and ask side of the market is similar. The effect of aggressive orders differ depending on the size of the firms. Trading activity measures such as volumes or number of transactions increase stronger for bigger than for smaller stocks, while spreads increase more for smaller firms than for bigger ones. These findings enrich the understanding of liquidity dynamics especially on the emerging markets where liquidity is an important price formation factor.     

The liquidity effects associated with addition of a stock to the S&P 500 index: evidence from bid/ask spreads

This study examines changes in stock liquidity, as measured by the bid/ask spread, when a stock is added to the S&P 500 Index. The paper presents evidence of a significant decrease in the bid/ask spread upon S&P 500 addition, however, this effect is limited to only those stocks that were not trading listed options. Further, the decrease in the bid/ask spread for nonoptioned stocks is accompanied by a significant and permanent increase in share price and trading volume. While optioned stocks experience a permanent increase in trading volume, they experience only a temporary increase in share price. The findings for optioned stocks support the hypothesis that the price and volume effects associated with S&P 500 addition derive from temporary price pressure. Findings pertaining to the nonoptioned stocks indicate that the price and volume effects associated with S&P addition reflect enhanced stock liquidity. The decrease in the bid/ask spread for nonoptioned stocks is attributed to informational efficiencies achieved via index arbitrage trading, and it is argued that this effect is mitigated for optioned stocks due to the pre-existence of arbitrage trading between the option and the underlying stock.     

The determinants of the price impact of block trades: further evidence

This article extends previous literature which examines the determinants of the price impact of block trades on the Australian Stock Exchange. As previous literature suggests that liquidity exhibits intraday patterns, we introduce time of day dummy variables to explore time dependencies in price impact. Following theoretical developments in previous literature, the explanatory power of the bid–ask spread, a lagged cumulative stock return variable and a refined measure of market returns are also examined. The model estimated explains approximately 29 per cent of the variation in price impact. Block trades executed in the first hour of trading experience the greatest price impact, while market conditions, lagged stock returns and bid–ask spreads are positively related to price impact. The bid–ask spread provides most of the explanatory power. This suggests that liquidity is the main driver of price impact.     

Intraday Patterns in the Cross‐section of Stock Returns

Motivated by the literature on investment flows and optimal trading, we examine intraday predictability in the cross‐section of stock returns. We find a striking pattern of return continuation at half‐hour intervals that are exact multiples of a trading day, and this effect lasts for at least 40 trading days. Volume, order imbalance, volatility, and bid‐ask spreads exhibit similar patterns, but do not explain the return patterns. We also show that short‐term return reversal is driven by temporary liquidity imbalances lasting less than an hour and bid‐ask bounce. Timing trades can reduce execution costs by the equivalent of the effective spread.     

Modelling and forecasting liquidity supply using semiparametric factor dynamics

We model the dynamics of ask and bid curves in a limit order book market using a dynamic semiparametric factor model. The shape of the curves is captured by a factor structure which is estimated nonparametrically. Corresponding factor loadings are modelled jointly with best bid and best ask quotes using a vector error correction specification. Applying the framework to four stocks traded at the Australian Stock Exchange (ASX) in 2002, we show that the suggested model captures the spatial and temporal dependencies of the limit order book. We find spill-over effects between both sides of the market and provide evidence for short-term quote predictability. Relating the shape of the curves to variables reflecting the current state of the market, we show that the recent liquidity demand has the strongest impact. In an extensive forecasting analysis we show that the model is successful in forecasting the liquidity supply over various time horizons during a trading day. Moreover, it is shown that the model's forecasting power can be used to improve optimal order execution strategies.     

Trading imbalances,predictable reversals,and cross-stock price pressure

We test the implications of a multi-asset equilibrium model in which a finite number of risk-averse liquidity providers accommodate non-informational trading imbalances. These imbalances generate predictable reversals in stock returns. An imbalance in one stock also affects the prices of other stocks. The magnitude of the cross-stock price pressure depends on the correlations of the stocks’ underlying cash flows. The model implies that non-informational trading increases the volatility of stock returns. We confirm the model's implications using data from the Taiwan Stock Exchange.     

Impact of liquidity on stock returns: an empirical investigation of the Tunisian stock market

This paper investigates the return–liquidity relationship on one Middle East and North Africa frontier market, the Tunisian Stock Exchange (TSE). The findings provide evidence that there is a significant and positive premium for companies with high price impact and low trading frequency. However, Tunisian investors appreciate more low spread stocks. We show, also, a non-linear relation between potential delays of execution and stock returns. In addition, we find that Tunisian investors require a premium to compensate past cumulative illiquidity risk (high price impact, low turnover and high potential delay of execution) over the prior three to 12 months and to compensate past cumulative spread over 12 months. We point out also that these effects are seasonal.     

The impact of mandatory IFRS reporting on institutional trading costs: Evidence from Australia

This study examines the impact of mandatory International Financial Reporting Standards (IFRS) on the market quality of the Australian Securities Exchange (ASX) 200 constituent stocks. Using traditional metrics that are consistent with prior literature (i.e., bid‐ask spreads), the first stage analysis confirms that stock liquidity has improved. However, when the analysis is extended to consider the trading costs incurred by market participants (i.e., execution shortfall), results suggest liquidity has not changed significantly. The paper utilizes rich unique datasets that contain detailed trade information, and findings are robust after controlling for trade difficulty and market conditions. In the era of High Frequency Trading (HFT) and occurrences of ‘fleeting’ liquidity, this paper provides some evidence that while IFRS may have enhanced ‘visible’ bid‐ask spreads, tangible liquidity for market participants, particularly global institutional investors, has not improved significantly.