Execution costs of financial markets from a microstructure approach: Evidence from Block trading and Transparency Regime switches.

• Main Authors: Hsiu-kuei Chen, 陳秀桂
• Other Authors: Tai Ma
• Format: Others
• Language: en_US
• Published: 2009
• Online Access: http://ndltd.ncl.edu.tw/handle/23kcfn

博士 === 國立中山大學 === 財務管理學系研究所 === 97 === This dissertation consists of two essays on the execution cost of financial markets. In the first essay, we study impacts of new block trading rules on two kinds of large trades, block trades (BTs) and splitting order trades (STs). We find some results with policy implications. First, targets traded in the block trading market are illiquid. The proportion of BTs (STs) is the decreasing (increasing) function of stock liquidity. Second, large orders are mainly executed by STs except for illiquid stocks, but investors prefer to trade in block trading market at times when trade size is large, probability of informed trading is lower and price volatility is mild. Third, under the new system, the conditional execution costs of BTs (STs) decline (do not decline) and the percentage of BTs (STs) increases (decreases).Fourth, BTs are uninformed with motivations of tax minimization, general trades and ownership transfer trades, while STs are information based. BTs for tax minimization (general trades) incur the lowest (highest) execution costs. Uninformed BTs incur higher execution costs than informed STs, reflecting “premiums of trading with the specific counterparty” of BTs. Finally, simulation analyses confirm that the block trading market functions well especially for illiquid stocks. In the second essay, we attempt to provide evidence regarding the welfare effect of pre-trade transparency affected by investor and order types. In order to understand the effect of transparency on welfare, we need to explore investors’ behavior adjustments (aggressiveness and order size adjustments) reacted to transparency. We find both individual and institutional investors are more willing to supply liquidity after transparency enhancement. Individual investors behave more aggressively and submit larger order as they supply and demand liquidity, while institutional investors are relatively conservative and submit smaller order in an open environment. We measure welfare of investors in terms of implementation shortfall, which is weighted average of price impacts and opportunity costs. Our main result is, on average, institutional and individual investors who demand immediacy benefit from pre-trade transparency, especially for institutional investors, while traders who supply liquidity are worse off except institutional investors. Intraday analysis further notices individual investors providing liquidity near the end of day lose most from transparency enhancement, while institutional and individual investors demanding liquidity win most in close interval.