Innovation in Trading Activity: Should Stock Markets Be More Transparent?

Abstract

The aim of the paper is to test whether different PTT levels are able to affect the volatility and liquidity of a Stock Exchange. Much research carried out over the last few years has attempted to describe these relationships, yet their empirical results have sometimes contradicted one another (see Section 2). Nevertheless, the innovative contribution of this paper is to study, on a large international scale and through a wide set of indicators, each of the three different PTT dimensions (specifically PTT1, PTT2 and PTT3) in relation to liquidity, on the one hand, and to volatility, on the other. Our attention is focused upon the equity division of the following 18 Stock Exchanges: the Hong Kong Stock Exchange, the Singapore Stock Exchange, the Australian Stock Exchange, the Toronto Stock Exchange, the New York Stock Exchange (NYSE), the NASDAQ, the American Stock Exchange (AMEX), the London Stock Exchange, Euronext (Paris, Amsterdam, Brussels and Lisbon), Deutsche Bourse (Xetra), the Madrid Stock Exchange, Borsa Italia, the Stockholm Stock Exchange, the Copenhagen Stock Exchange and the Helsinki Stock Exchange. All these stock markets are electronic order driven or hybrid markets. Pure quote driven Stock Exchanges are not typically attended by high frequency traders, because they admit orders sent only by market makers.

Keywords: Liquidity, volatility, pre-trade transparency, market microstructure

JEL Classification: C31, G12, G14, G15