, Volume 34, Issue 2, pp 179-197

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.

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.