THE CHOICE OF TRADING VENUE AND RELATIVE PRICE IMPACT OF INSTITUTIONAL TRADING: ADRs VERSUS THE UNDERLYING SECURITIES IN THEIR LOCAL MARKETS

We address two important themes associated with institutions’ trading in foreign markets: (1) the choice of trading venues (between a company's listing in its home market and that in the United States as an American Depositary Receipt [ADR]) and (2) the comparison of trading costs across the two venues. We identify institutional trading in both venues using proprietary institutional trading data. Overall, our research underscores the intuition that the choice of institutional trading in a stock's local market or as an ADR is a complex process that embodies variables that measure the relative adverse selection and liquidity at order, stock, and country levels. Institutions route a higher percentage of trades to more liquid markets, and these trades are associated with higher cumulative abnormal returns. We also find that institutional trading costs are generally lower for trading cross‐listed stocks on home exchanges even after controlling for selection bias.     

CHANGING VOLATILITY AND THE PRICING OF OPTIONS ON STOCK INDEX FUTURES

This paper presents empirical results regarding the suitability of the Black model for the pricing of options on stock index futures. Whaley's technique is used to present empirical evidence regarding the pricing biases of the model. Information provided by the implied volatilities suggests that model refinements should address the changing volatility issue.     

FURTHER EVIDENCE ON INSIDER TRADING AND THE MERITS OF SECURITIES CLASS ACTIONS

To provide further evidence on the merits of securities class actions, we examine insider transactions immediately before and during the class period, using a larger and newer data set. We show that insiders reduce their stock sales by an abnormal amount immediately before the class period. Alternative measures of insider transactions and analysis of data before the enactment of the Private Securities Litigation Reform Act of 1995 provide consistent results. These new findings indicate that class actions, on average, have merit. Our data also reestablish a previous empirical result that there is no abnormal selling during the class period.     

SHORT TERM IMPACT OF OPTION TRADING ON UNDERLYING SECURITIES

This paper examines the short-term impact of option listing before and after the moratorium. There is no clear evidence that option trading has an effect on volatility or variability of shares traded daily. However, when the results are evaluated by year of trading, two significant trends can be identified. A trend toward decreased price volatility and increased variability in the number of shares traded daily is shown in the underlying security shortly after option trading begins.     

INFLUENCE OF TREASURY BILL FUTURES TRADING ON THE PRIMARY SALE OF THE DELIVERABLE TREASURY BILL

This paper investigates the impact of the presence of Treasury bill (T-bill) futures market contracts on the primary auction price of deliverable T-bills. Of the 52 weekly three- and six-month T-bill auctions, only four are deliverable against the T-bill futures market contract. This unique ability to deliver may command a premium price in the primary market. The results of this study support this hypothesis with regard to the six-month auction but are inconclusive with regard to the three-month auction. Furthermore, there is some evidence that the 1983 rule change making the one-year T-bill a deliverable instrument reduced the size of the premium in the six-month bill auction.     

CHANGES IN TRADING ACTIVITY FOLLOWING STOCK SPLITS AND THEIR EFFECT ON VOLATILITY AND THE ADVERSE-INFORMATION COMPONENT OF THE BID-ASK SPREAD

We examine changes in trading activity around stock splits and their effect on volatility and the adverse-information component of the bid-ask spread. Even after controlling for microstructure biases, we find a significant increase in volatility after the split. Changes in total volatility and in its permanent component are positively related to changes in the number of trades. This suggests that both informed and noise traders contribute to changes in trading activity. Further, while the adverse-information component of the spread increases unconditionally after the split, the change is negatively related to the change in trading activity. The results suggest that a crucial determinant of liquidity changes after a stock split is the success of the split in attracting new trades in the security.     

THE INFLUENCE OF ORGANIZED OPTIONS TRADING ON STOCK PRICE BEHAVIOR FOLLOWING LARGE ONE-DAY STOCK PRICE DECLINES

In this study I examine the effect of organized options trading on stock price behavior immediately following stock price declines of 10 percent or more. A matched-pair sample of National Market System option and nonoption firms are analyzed from June 1985 through December 1992. After controlling for the bid-ask bounce, firm size, share price, return standard deviation, and beta, I find that three-day cumulative abnormal returns for option firms are approximately 1.57 percent less than those for nonoption firms. Thus, options trading enhances stock market efficiency and/or liquidity. However, no profitable trading strategies are indicated.     

THE EFFECT OF TRADING IN EIGHTHS ON SECURITY RETURN BEHAVIOR

Currently the equity securities of most British, Canadian and US firms trade in eighths. However, this pricing system may soon be abandoned in the US. Specifically, the US Securities and Exchange Commission (SEC) is currently studying the feasibility of changing the pricing of US securities to dollars and cents from dollars and eighths. 'SEC officials contend that moving to a system that quotes stock prices in dollars and cents would create efficiency in the stock market that eighths and sometimes sixteenths can't permit' (Torres and Salwen, 1991). This paper demonstrates the inefficiencies that result from constraining stocks to trade in eighths of a dollar. It describes the effects on returns and betas; then, it presents empirical evidence consistent with the effects. Systematic differences in the distributions of returns of low and high-priced stocks are documented. The covariance of returns with a market index is shown to vary systematically across stocks of different prices and to depend on the return interval used to estimate market model parameters. The variations are explainable by an observed lag between the returns of low-priced stocks relative to those of high-priced stocks. The lag is partially attributable to trading in eighths. A systematic relationship that varies with share price is observed between market model residual returns and unadjusted returns. This relationship is not eliminated by using longer return intervals alone. The extent of the relationship is reduced when longer return intervals are combined with the use of a market index composed of stocks that are priced similarly to those of the securities being tested. The implications of these results for capital market studies are discussed.     

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.