A Comparison of China Main Board and Growth Enterprise Market Board - Market Microstructure Approach

Abstract

We compare the market quality of the newly established, second board of the China stock market, the Growth Enterprise Market (GEM) with the Main board, and examine its impact on the Main board from the market microstructure perspective. Using the newly available transaction level data, several findings emerge. First trading activities of the Main board stocks increases after the introduction of GEM Board, suggesting the establishment of GEM is not at the expense of the Main board but instead enhance the overall trading activities in China. Pricing error variances are not different in the two Boards while GEM stocks have larger adverse selection cost component of bid-ask spread and higher probability of information-based trading which indicate a larger information asymmetry among traders on average in GEM stocks than those in the Main board. Interestingly we find that the 15 minute returns of Main Board stocks strongly lead that of GEM stocks but the GEM board only weakly leads Main Board, evidencing information transmission from the Main board to the GEM. Overall our findings suggest that the market quality of the GEM is of sufficiently good to provide an important, alternative listing venue for high potential firms in China.