Levelling the Trading Field
Cornell University - Department of Economics
University of California, Berkeley - Haas School of Business
University of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance; Centre for Economic Policy Research (CEPR)
March 24, 2013
Journal of Financial Markets, Forthcoming
We examine the impact on stock prices of a major upgrade to the New York Stock Exchange’s trading environment. The upgrade was sequentially implemented across groups of stocks. The upgrade improved information dissemination on the trading floor and reduced the latency in reporting trades and quotes. We show that the portion of the upgrade that reduced latency and transparency for electronic orders had significant impacts on liquidity, turnover, and returns. A portfolio that is long stocks undergoing the upgrade in the first 20 days of the upgrade process and short stocks receiving the upgrade later has a return of roughly three percent over the period, depending on the method of risk adjustment. This return differential is eliminated when all stocks are upgraded. We argue that the abnormal return was a priced effect of the improved liquidity produced by the upgrade.
Number of Pages in PDF File: 48
Keywords: market structure, stock exchange, trading volume, transparency, information, latency, technology upgrade
JEL Classification: G12, G14
Date posted: February 5, 2007 ; Last revised: June 30, 2013
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