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With or without you: market quality of floor trading when screen trading closes early

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Abstract

Most stock markets are characterized by a number of parallel operating trading systems which interact intensively with each other. Usually, smaller trading platforms take the leading domestic main market as a benchmark in the price discovery process and for closing open trading positions. But what happens if the smaller trading systems suddenly have to act without this benchmark platform? We examine the effects of the reduction of the daily business hours of a screen based main trading system while a parallel floor based trading system keeps on operating. We provide evidence that liquidity improves while informed trading and informational efficiency of prices decrease at the floor based trading system as a result of the no longer operating main market. While prior research on parallel trading focuses on changes due to a growing number of trading venues, we present the first evidence on market effects when the main trading platform reduces trading hours.

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Notes

  1. See Boehmer and Boehmer (2003), Battalio (1997), Wahal (1997), Mayhew (2002), Fong et al. (2001), DeFontnouvelle et al. (2000), Conrad et al. (2003), Biais (1993) or Chowdhry and Nanda (1991).

  2. See Bernhardt and Hughson (1997), Amihud et al. (2003), Arnold et al. (1999), Madhavan (1995), Jain (2002), Pagano (1989a, b).

  3. See Barclay and Hendershott (2003, 2004) and McInish et al. (2002).

  4. Numerous studies provide evidence that trading activities display intraday pattern, such as: Wood et al. (1985), Jain and Joh (1988), McInish and Wood (1992), Abhyankar et al. (1997) and Chan et al. (1995).

  5. The trading system Xetra of Deutsche Börse AG opened every business day from 9:00 a.m. to 8:00 p.m. in the past. Since Nov. 3, 2003 Xetra operates every business day only until 5:30 p.m. For further details see Sects. 2 and 3.

  6. Goodfellow and Bohl (2006) and Goodfellow et al. (2008) analyze the same event as we do. In contrast to this study, they focus on the implications for institutional and retail investors. They reason, that due to the event after hour trading has become more attractive for retail investors. However, their main findings are in line with observations made in this study.

  7. For further information on the microstructure of German equity markets see Demarchi and Foucault (2000) and Commerton-Forde and Rydge (2004).

  8. The membership of the security in the CDAX does not qualify for “Prime Standard”, given that this index includes all listed companies.

  9. See Reck (2001) and Theissen (2003a) for a description of the trading system Xetra.

  10. The first day with the new Xetra operating hours was Monday Nov. 3, 2003. The last day of trading with the old operating hours was Friday Oct. 31, 2003.

  11. See Theissen (2003a, b) for an overview on the trading system of the floor of the FSE.

  12. A larger number of securities (none included in the sample) is too illiquid for continues trading. Thus, only daily call auctions are conducted. The same applies for Xetra.

  13. See Easley et al. (1996, 1997a, b, and 2002).

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Authors and Affiliations

  1. Endowed Chair for Banking and Finance, European Business School (EBS), International University, Schloß Reichartshausen, 65375, Oestrich-Winkel, Germany

    Dirk Schiereck

  2. Xetra Market Development, Deutsche Börse AG, 1 Canada Square 42nd Floor, London, E14 5DR, United Kingdom

    Christian Voigt

Authors
  1. Dirk Schiereck
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  2. Christian Voigt
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Correspondence to Christian Voigt.

Additional information

We thank the Deutsche Börse AG for providing the data. We are grateful to António Cerqueirathe, Alexandra Hachmeister, Guo Ying (Rosemary) Luo, Mark van Achter, Dennis Vrecko; participants of the 4th PFN International Conference 2006 Porto, Portugal, the 34th Annual Meeting of the Academy of Economics and Finance 2007, Jacksonville, USA, and the 14th Annual Meeting of the Germany Finance Association (DGF) 2007, Dresden, Germany; 2nd Annual Conference on Market Structure and Market Integrity 2007, Toronto, Canada. Any remaining errors are, however, solely our own responsibility. A large part of this work was completed when Dirk Schiereck was Professor and the Endowed Chair of Finance at the European Business School and Christian Voigt was Research Assistant at the European Business School. The views expressed in this article are those of the authors and do not necessarily reflect the views of Deutsche Börse AG, any of its subsidiaries, or anyone else.

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Schiereck, D., Voigt, C. With or without you: market quality of floor trading when screen trading closes early. Rev Quant Finan Acc 34, 179–197 (2010). https://doi.org/10.1007/s11156-010-0164-5

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