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Abstract:
We address the question of whether a stock exchange should reveal the identity of brokers placing limit orders utilizing five natural experiments. Euronext Paris and Brussels, the Tokyo Stock Exchange and the Australian Stock Exchange have all removed broker identification from the limit order book, while the Korea Stock Exchange has introduced broker identification. As predicted by Fishman and Hagerty (1995), anonymity increases the bid-ask spread for all stocks, but especially for smaller stocks with the highest information asymmetry. It also results in decreased trade volume and increased intraday volatility. We show that existing studies of these events suffer from an endogeneity problem that is overcome using strong instrumental variables.

Transparency, Opacity, Broker identity, Limit order book, Endogeneity

Abstract:
This paper utilizes a system of structural equations and a unique intra-day dataset for 33 major exchanges making up 96% of world equity to evaluate the impact of transparency-enhancing stock market design features on transactions cost, volatility, trade size, trade numbers and traded value to explain relative global trading activity. We use this new methodology to evaluate transparency-related design features. We find that large stocks trade better in relatively opaque markets revealing little depth and with 'iceberg' orders but with disclosed broker IDs and immediate reporting of block trades, whereas small stock benefit from very transparent markets revealing depth, no icebergs, instant reporting and broker ID disclosure. With medium stocks, it is better to reveal depth, report immediately, but to allow iceberg orders and not encourage broker ID disclosure.

Market Design, Exchange trading systems, Transparency, Opacity, Decimalization

Abstract:
Existing strategic behaviour models indicate that the strategic interaction of informed and liquidity traders leads to systematic intraday patterns on stock exchanges. This paper uses a unique database from the Helsinki Stock Exchange, which allows the parties of all trades to be identified so that their transactions can be tracked intra-day and over time. We classify traders as either informed or liquidity traders based on their stock picking ability. Consistent with previous research, we illustrate that volume and volatility are concentrated at the open and close of the trading day, while spreads are widest at these times. Both informed and liquidity traders concentrate trading at the open and close. We demonstrate that volume negatively affects spreads, while volatility and the proportion of informed traders positively affect spreads. A new result is the significant increase in the proportion of informed trading across the trading day. Consistent with the strategic behaviour models proposed by Foster and Viswanathan (1996) and Wang (1998), the results illustrate that a significant proportion of intraday patterns can be explained by strategic trading by informed and liquidity traders.

Informed trading, liquidity trading, strategic behaviour, intraday patterns

Abstract:
We evaluate the impact of stock market transparency and opacity design features on global trading activity, including the share of traded value for cross-listed stocks. Our methodology relies on a system of simultaneous structural equations estimated for the world's major exchanges. We find that in relatively opaque markets (those revealing little in the way of market depth), large stocks benefit from lower trading costs, lower volatility and higher traded value. Small stocks do best in highly transparent markets. Although several transparency features benefit all stocks, we conclude that transparency requirements can differ such that one design need not fit all stock sizes.

market design, exchange trading systems, transparency, opacity, decimalization

Abstract:
Analysts should play an important role in making stock prices properly reflect changes in the value of listed firms' operations. Yet research shows that there are systematic biases in analysts' research induced by personal conflicts of interest faced by the analyst. This paper reports research concerning brokerage firm's clients' response to analysts' recommendation changes on the Helsinki Stock Exchange from 1995 to 2004. The issue that we focus on is whether there is evidence that recommendation changes are used to facilitate execution of trades for important clients rather than as pointers to existing misevaluations in the stock market. Our results reveal that some recommendation changes seem more likely to have been generated by an attempt to execute a sizeable order rather than by genuine revision of expectations concerning the future profitability of the analyzed firm.

Brokerage firm trading volume, Analyst recommendations, Trading incentives, Stock price changes.

Abstract:
The home bias in international portfolios has been explained by foreign investors' exposure to more severe moral hazard problems than domestic investors. A drop in expected returns will increase the likelihood of these hazards, causing foreign investors to react more strongly to profit warnings than domestic investors. In data on profit warnings, intraday trades, and shareholder deposits from the Helsinki Stock Exchange foreign investors are more likely to sell and domestic investors more likely to buy following profit warnings. The extent of foreign investor reaction depends on the level of surprise at the profit warning, perceived information asymmetry, and corporate governance-related indicators. We also consider alternative explanations, foreign investors' sophistication, familiarity of company, information uncertainty and the treatment of the foreign investments as small growth companies.

profit warnings, home bias, moral hazard

Abstract:
This study re-examines the dual issue of international investor trading patterns and the performance that is subsequently generated. An information disadvantage amongst foreign investors could explain the home bias puzzle. Domestic investors follow contrarian patterns and foreign investors follow momentum patterns. Foreign investors are superior performers and informed in the two year sample but inferior performers and uninformed in the ten year sample. This is increasingly significant as the most internationally familiar stocks are excluded from the sample. Trader profit analysis, mimicking spectral decomposition, is used to highlight trading biases and is rejected for inferring informational endowments.

Investor performance, Momentum, Contrarian, Home Bias

Abstract:
This paper aims to investigate if derivatives instruments act as a substitute for short sales during periods of restriction imposed on short selling in the cash market for stocks. Contrasting the trading activity in derivative instruments to the underlying stocks, we find no evidence of a transfer of short selling interests to the derivatives markets. In fact we find that trading volumes in derivatives are more negatively affected by the restrictions and the general liquidity crisis than for stocks where trading activity is actually increasing during the period. A larger proportion of price discovery is occurring in the cash market for stocks as opposed to futures during the crisis period, comparing 2008 to 2007.

short selling restrictions

Abstract:
It remains debatable whether poison pills create or dilute shareholder wealth. The present study examines the Japanese market, where the adoption of poison pills accelerated during 2006 and 2007. Companies with lower ownership by keiretsu affiliates, employees and management are more likely to adopt poison pills. The adoption of a poison pill is associated with lower post-adoption excess returns, relative to firms that do not employ the defense. However, this is mitigated where there is a positive perception of incumbent management.

Japan, keiretsu, takeover defense, poison pill, ownership structure

Abstract:
Crossed and internalised upstairs trades are analysed in a data set in which institutional investors can be identified. Earlier findings that upstairs trading is uninformed, tap into unexpressed liquidity and do not affect market quality are revisited. The permanent price effect of crossings and internalised upstairs trades is significantly lower than that of limit order book trades due to that the least informed institutional trades are routed upstairs. Crossed and internalised trades affect the depth and transaction costs in the limit order book and a significant proportion of liquidity driven institutional trading is routed to the limit order book.

crossing, internalisation, upstairs, limit order book, market quality

Abstract:
Following recent literature we hypothesize that when a firm's expected future earnings fall foreign investors will more likely suffer from moral hazard than domestic investors. A downward revision in a firm's expected future earnings should thus make foreign investors sell the firm's shares more extensively than domestic investors. We test this hypothesis on profit warnings issued at the Helsinki Stock Exchange. Our results reveal that in the wake of profit warnings foreign investors will predominantly sell, domestic investors picking up the net sales by foreigners. Our proxy for the magnitude of surprise in the warning is the most important variable in explaining the degree of foreign dominance among sellers. The relative strength of the foreign investor sell out reaction also depends on characteristics of the firm that issued the warning. Better corporate governance cushions the reaction by reducing insider and managerial moral hazard, while a higher degree of perceived information asymmetry strengthens it.

profit warnings, home bias, moral hazard

Abstract:
We present institutional features of the Nordic initial public offering (IPO) markets and relate initial return, long-run performance and size of companies listed during 1991-2002 to industry clustering and level of listing requirements. High industry clustering is related to higher initial return and lower long-run performance supporting our prediction that information asymmetry has an impact on initial underpricing while temporary overvaluation affects long-run performance. The relatively high listing requirements and targeting of the main market have not protected the Nordic IPOs from poor long-run performance. On two markets, Norway and Denmark, IPOs outperform the all share market index.

Abstract:
In 1999 the Korean Securities Exchange introduced its public limit order book displaying volume, price and broker identity to all market participants. Going against the general trend in market design, the KSE event provides important information for exchanges that are deciding between a transparent market, preferred by most participants, and an anonymous market accommodating large institutions and their brokers. Using several alternative metrics for market quality and estimation methodology accounting for fixed firm effects and endogeneity in explanatory variables, we find the expected effects on market quality. This is in contrast to most previous research, which supports the drive for opacity. We find that when limit orders are public, spreads fall, volatility increases and volume increases. The current policy of the Korean Stock Exchange to publicly display the 10 best orders, including broker identity and trades is provisionally best practice, as it promotes higher traded volume, the most important indicator of gains from trade within a trading system.

Transparency, Broker ID, Market Quality

Abstract:
Crossed and internalized upstairs trades are analysed in a dataset in which institutional investors can be identified. Earlier findings that upstairs trading is uninformed, taps into unexpressed liquidity, and does not affect market quality are revisited. The permanent price effect of crossings and internalized upstairs trades is significantly lower than that of limit order book trades due to the fact that the least informed institutional trades are routed upstairs. Crossed and internalized trades affect the depth and transaction costs in the limit order book and a greater reliance is placed on the upstairs market when liquidity is low and volatility is high.