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We empirically investigate the impact of price limits on volatility and autocorrelation in the call auction segment of the Warsaw Stock Exchange (WSE). Since call auctions offer time-out periods to investors, we do not expect price limits to counter overreaction and panic in this market structure. Indeed, our empirical findings show that price limits result in excess volatility on the next trading day and strong continuation of price movements, which indicates that price limits only delay the adjustment of prices to equilibrium levels. Our results question the necessity of price limits in the call auction system of the WSE.
The electronic call auction is an important trading vehicle in many market centers around the world, and it should play a far more central role in the U.S. equity markets. Yet call auctions are not known or understood by many market participants in the U.S. The purpose of Call Auction Trading: New Answers to Old Questions is to consider how a call auction facility operates and its broader role in the marketplace. A spectrum of questions are raised and debated. What is a call auction? How should call auctions be designed? How should call auction and continuous trading be integrated in a hybrid market structure? What is the price discovery function of a call auction, especially at market openings? When the dust settles on the answers, it may be recognized that the introduction of electronic call auction trading in our markets is one of the most profound changes in U.S. equity market structure that could be made.
ROBERT A. SCHWARTZ The primary objective of this book is to consider how the inclusion of electronic call auction trading would affect the performance of our U.S. equity markets. The papers it contains focus on the call auction and its role in a hybrid market struc ture. The purpose is to increase understanding of this trading environment, and to consider the design of a more efficient stock market. This book had its origin in a symposium, Electronic Call Market Trading, that was held at New York University's Salomon Center on April 20, 1995. Nearly 150 people from 16 different countries attended. At the time, three proprietary trading systems based on call auction principles (The Arizona Stock Exchange, Posit, and Instinet's Crossing Network) had been operating for several years and interest already existed in the procedure. Since the symposium, increasing use has been made of call auctions, primarily by the ParisBourse in its Nouveau Marchi: and CAC markets, by Deutsche Borse in its Xetra market, and in the U.S. by OptiMark. Rather than being used as stand alone systems, however, call auctions are now being interfaced with continuous markets so as to produce hybrid market structures, a development that is given considerable attention to in a number of the chapters in this book.
This book is based on the proceedings of The Electronic Call Auction: New Answers to Old Questions, a conference hosted by the Zicklin School of Business on May 16, 2000. The text includes the edited transcripts of the panel discussions and separate addresses by three major industry executives Douglas M. Atkin, formerly President and CEO, Instinet Corporation; Kenneth D. Pasternak, formerly President and CEO, Knight/Trimark Group, Inc., and William J. Brodsky, Chairman and CEO, Chicago Board Options Exchange. The electronic call auction is an important trading vehicle in many market centers around the world, but is not well understood in the US. What are call auctions? How should they be designed and integrated with continuous trading in a hybrid market structure? As call auctions play a more central role in the US markets, how will they affect market quality in terms of transparency, order flow consolidation, and price discovery? These and other critical questions were asked at the conference while the efficiency of the US markets was broadly assessed.
This open access book addresses four standard business school subjects: microeconomics, macroeconomics, finance and information systems as they relate to trading, liquidity, and market structure. It provides a detailed examination of the impact of trading costs and other impediments of trading that the authors call rictions It also presents an interactive simulation model of equity market trading, TraderEx, that enables students to implement trading decisions in different market scenarios and structures. Addressing these topics shines a bright light on how a real-world financial market operates, and the simulation provides students with an experiential learning opportunity that is informative and fun. Each of the chapters is designed so that it can be used as a stand-alone module in an existing economics, finance, or information science course. Instructor resources such as discussion questions, Powerpoint slides and TraderEx exercises are available online.
We evaluate a stock specific circuit breaker mechanism implemented in several European stock exchanges, which consists of a short-lived call auction triggered by intraday stock-specific price limits. This switching mechanism differs from the previously studied US trading halts in that it is short-lived, non-discretionary, and there is always a trading mechanism (continuous or discrete) going. It differs from daily price limits in that trade prices are not restricted once the limit has been hit; moreover, the intraday price ranges are smaller and adjusted to the recent volatility of the stock, so that limit hits are more frequent. Using data from the Spanish Stock Exchange (SSE), we show that market conditions remain usually high no longer than 90 minutes after the resumption of the continuous session. Adverse selection costs are unusually high near the time of the limit hit, but they revert to normal levels in no longer than 30 minutes after the restart of continuous trading phase. Moreover, price patterns show continuations during the 5-minute auction period and strong reversals in the 30-minute interval following the resumption of the continuous session. Afterwards, prices stabilize. These price patterns suggest that limit hits in the SSE are mostly provoked by noise traders overreacting to new information. We also show that higher returns during the auction are both preceded and followed by more unstable market conditions and higher adverse selection costs, and lead to stronger post-auction price reversions. Our findings contribute to the debate about the benefits and drawbacks of circuit breakers by enlarging the span of these mechanisms studied so far.
Includes the first published detailed description of option exchange operations, the first published treatment using only elementary mathematics and the first step-by-step procedure for implementing the Black-Scholes formula in actual trading.
An in-depth look at the nature of market making and exchanges From theory to practicalities, this is a comprehensive, up-to-date handbook and reference on how markets work and the nuances of trading. It includes a CD with an interactive trading simulation. Robert A. Schwartz, PhD (New York, NY), is Marvin M. Speiser Professor of Finance and University Distinguished Professor in the Zicklin School of Business, Baruch College, CUNY. Reto Francioni, PhD (Zurich, Switzerland), is President and Chairman of the Board of SWX, the Swiss Stock Exchange, and former co-CEO of Consors Discount Broker AG, Nuremberg.
The interactions that occur in securities markets are among the fastest, most information intensive, and most highly strategic of all economic phenomena. This book is about the institutions that have evolved to handle our trading needs, the economic forces that guide our strategies, and statistical methods of using and interpreting the vast amount of information that these markets produce. The book includes numerous exercises.