JSE equity market liquidity: The impact of technology and resultant microstructure changes

• Main Author: Hattingh, Adéle
• Format: Others
• Language: en
• Published: 2014
• Online Access: http://hdl.handle.net/10539/15169

The JSE Equity Market has evolved significantly since floor trading ended in 1996. Fast and efficient trading technology is attractive to market participants based not only locally but internationally as well. How quick and cost effectively a trader can enter and exit a market plays a significant role in defining a market place’s liquidity. Liquidity is multidimensional, making it not only difficult to isolate a particular dimension but also challenging to fully measure, according to Liu (2006). Growth in trading activity following each trading engine upgrade in the JSE Equity Market has been quite evident. The microstructure changes, such as low latency trading that came about because of the technological enhancement and the plethora of academic research concerning high speed trading and liquidity, begged the question as to whether there was a trend regarding the exchange’s liquidity. It also questioned whether all liquidity was the same and whether it truly was as multidimensional as some authors have suggested. The purpose of this study was, using different liquidity measurements and methodologies, to determine whether liquidity improved or diminished during an eight-year period from 2 July 2005 to 1 July 2013. An ANOVA analysis was done using each liquidity measurement’s results to determine differentiation between each July-to-July year and ascertain whether the liquidity was affected particularly after the implementation of the JSE’s latest trading engine upgrade. The study also aimed to determine whether these liquidity measurements liquidity rankings were in any way connected to each other using correlation. Thirdly, a portfolio event study was conducted to gauge whether the impact on liquidity due to the JSE’s 2012 trading engine upgrade, was statistically significant. Lastly, the aforementioned liquidity measurements which had shown changes in liquidity that were statistically significant were compared to the activity of low latency trading strategies on the JSE. Overall, the results were varied and not fully conclusive to show a positive relationship between the trading engine upgrade, low latency trading and liquidity.