Speed of Convergence to Market Efficiency: The Role of ECNs

Posted: 11 Feb 2011 Last revised: 29 Sep 2012

See all articles by Karel Hrazdil

Karel Hrazdil

Simon Fraser University

Dennis Y. Chung

Simon Fraser University

Date Written: August 20, 2012

Abstract

Chordia, Roll and Subrahmanyam (2005, CRS) estimate the speed of convergence to market efficiency based on short-horizon return predictability of the 150 largest NYSE firms. We extend CRS to a broad panel of NYSE stocks and are the first to examine the relation between electronic communication networks (ECNs) and the corresponding informational efficiency of prices. Overall, we confirm CRS’s result that price adjustments to new information occur on average within five to fifteen minutes for large NYSE stocks. We further show that it takes about twenty minutes longer for smaller firms to incorporate information into prices. Most importantly, we demonstrate that the speed of convergence to market efficiency is significantly related to the type of trading platform where orders are executed, even after controlling for relative order flows, trading costs, volatility, informational effects, trading conditions, market quality, institutional trading activity, and other firm-specific characteristics. Our findings provide direct answers and insights to issues raised in a recent SEC concept release document.

Keywords: ECN, Speed, Market efficiency, NYSE, Arca

JEL Classification: G10, G14

Suggested Citation

Hrazdil, Karel and Chung, Dennis Y., Speed of Convergence to Market Efficiency: The Role of ECNs (August 20, 2012). Journal of Empirical Finance, Vol. 19, No. 5, pp. 702-720, 2012. Available at SSRN: https://ssrn.com/abstract=1757970 or http://dx.doi.org/10.2139/ssrn.1757970

Karel Hrazdil (Contact Author)

Simon Fraser University ( email )

Faculty of Business Administration
8888 University Drive, Simon Fraser University
Burnaby, British Colombia V5A 1S6
Canada
778-782-6790 (Phone)
778-782-4920 (Fax)

HOME PAGE: http://www.sfubusiness.ca

Dennis Y. Chung

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

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