Continuous Trading or Call Auctions: Revealed Preferences of Investors at Tase

30 Pages Posted: 20 Mar 2000

See all articles by Avner Kalay

Avner Kalay

Tel Aviv University - Faculty of Management; University of Utah - David Eccles School of Business

Li Wei

University of Utah

Avi Wohl

Tel Aviv University - Coller School of Management

Abstract

During a period of 14 months (August 1997-September 1998), the Tel Aviv Stock Exchange completed a gradual transition from call auctions to continuous trading. During this transition period stocks traded either in call auctions or in continuous trading mechanisms. Data from this period provides a unique opportunity to compare the two trading systems. We find that in the competition for order flow, the continuous trading mechanism is the clear winner. We find that the move to continuous trading imposed negative externalities on securities that continued to trade in a call auction - we observe a dramatic reduction in their volume of trade. Of particular interest is the effect of the move on the less liquid small-cap securities as many researchers doubt that it will benefit them. However, the move of small-cap securities to continuous trading is associated with a significant increase in their volume of trade. Indeed, these moves induce a positive stock price response (positively correlated to the volume increase). At the completion of the move of all the securities, we observe increase in the relative volume of larger stocks at the expense of the liquidity of small-cap stocks. It seems that large stocks capture almost all the benefits of this move. However, unlike recent decisions of exchanges in Paris, Lisbon and Brussels, our evidence indicates that we should move small-cap stocks to continuous trading as well. Finally, we find evidence consistent with the hypothesis that following the move to continuous trading security prices are noisier and they adjust faster to new information.

JEL Classification: G14, G18

Suggested Citation

Kalay, Avner and Wei, Li and Wohl, Avi, Continuous Trading or Call Auctions: Revealed Preferences of Investors at Tase. Available at SSRN: https://ssrn.com/abstract=209308 or http://dx.doi.org/10.2139/ssrn.209308

Avner Kalay (Contact Author)

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
972 3 6406298 (Phone)
972 3 6406330 (Fax)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
801-581-5457 (Phone)

Li Wei

University of Utah ( email )

1645 E. Campus Center
Salt Lake City, UT 84112
United States

Avi Wohl

Tel Aviv University - Coller School of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 6409051 (Phone)

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