The Impact of Trading Floor Closure on Market Efficiency: Evidence from the Toronto Stock Exchange
Posted: 20 Jul 2013 Last revised: 2 Oct 2020
Date Written: June 30, 2015
Abstract
On 23 April 1997, the Toronto Stock Exchange closed its trading floor, making it at that time the second-largest stock exchange in North America to choose a purely electronic trading environment for its equities. Exploiting this natural experiment, we find that the move to electronic trading resulted in a higher cost of immediacy (bid–ask spreads), increased information asymmetry and an overall deterioration of short-horizon return predictability from past order flows, reducing the efficiency of price discovery. Our results suggest that the human element plays an important role in order execution and complements automated electronic trading by improving the efficiency of incorporating new information into prices.
Keywords: Electronic trading, floor closure, Market efficiency, TSX
JEL Classification: N22, G14
Suggested Citation: Suggested Citation