A Worldwide Examination of Exchange Market Quality: Greater Integrity Increases Market Efficiency

44 Pages Posted: 22 Jul 2011 Last revised: 22 Apr 2014

Frederick H. deB. Harris

Wake Forest University; Capital Markets CRC Limited (CMCRC)

Michael J. Aitken

Macquarie Graduate School of Management

Shan Ji

Capital Markets CRC

Date Written: April 21, 2014

Abstract

We develop a framework for assessing security market quality (MQ), relating five elements of market design to three metrics of market integrity and two metrics of market efficiency. We empirically implement this integrity-efficiency MQ framework by testing a hypothesis that trade-based ramping manipulation at the close (MTC) raises execution costs on 24 security markets worldwide. Estimating a simultaneous equations model of ramping incidence, spreads, and the probability of deploying real-time surveillance (RTS), we show that quoted bid-ask spreads are positively related to the incidence of MTC across seven liquidity deciles. The magnitude is economically significant; improving market integrity by cutting MTC in half reduces spreads 6 to 11%. Allowing direct market access in conjunction with RTS, conducting auctions at the close, and developing regulations that require surveillance, all reduce MTC and thereby lower spreads, assuring better market integrity and enhancing market efficiency. Introducing circuit breakers or prohibiting shorts poses integrity-efficiency tradeoffs.

Keywords: Market integrity, business ethics, security market quality, market manipulation

JEL Classification: G28

Suggested Citation

Harris, Frederick (Rick) H. deB. and Aitken, Michael J. and Ji, Shan, A Worldwide Examination of Exchange Market Quality: Greater Integrity Increases Market Efficiency (April 21, 2014). Available at SSRN: https://ssrn.com/abstract=1890928 or http://dx.doi.org/10.2139/ssrn.1890928

Frederick (Rick) H. deB. Harris (Contact Author)

Wake Forest University ( email )

2601 Wake Forest Road
Babcock Graduate School of Management
Winston-Salem, NC 27109
United States
336-758-5112 (Phone)

Capital Markets CRC Limited (CMCRC) ( email )

Level 3, 55 Harrington Street
Sydney, 2000
Australia

Michael J. Aitken

Macquarie Graduate School of Management ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Shan Ji

Capital Markets CRC ( email )

GPO Box 970
55 Harrington Street
Sydney, NSW 2001
Australia
+61280884237 (Phone)

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