Continuous Trading or Call Auctions: Revealed Preferences of Investors at Tase
30 Pages Posted: 20 Mar 2000
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: Suggested Citation