Broker ID Transparency and Price Impact of Trades: Evidence from the Korean Exchange

International Journal of Managerial Finance, Vol. 11 Iss: 1, pp.117 - 131 (2015)

Posted: 25 Sep 2013 Last revised: 18 Aug 2015

See all articles by Thu Phuong Pham

Thu Phuong Pham

University of Adelaide; IPAG Business School; Financial Research Network (FIRN)

Date Written: September 3, 2013

Abstract

Purpose: The paper examines the changes in the price impact of trades in the major Korean stock market following the introduction of disclosure to all traders of the top five brokers on the buy-side and the top five brokers on the sell-side of trades in real time for each stock in the KOSDAQ market.

Design/methodology/approach: The paper uses several alternative metrics for the price impact of trades. The study applies estimation methodology that accounts for the potential endogeneity of other market quality proxies, which are used as control variables in price impact regressions, by utilizing two-stage-least-square methods with fixed effect specification.

Findings: This study finds that the permanent price impact (information effect) of both buyer- and seller-initiated trades increases, which indicates that information is disseminated quicker in a transparent market. Uninformed trades have a larger permanent price impact than informed trades on both the buy and sell sides. The liquidity price effects are found to be mixed for buys and sells.

Research implications: The study supports the current policy of the Korean Exchange to publicly display the five most active broker IDs on both the buy and sell sides, as it attracts both informed and liquidity traders, leading to faster price discovery in a more transparent market. However, a future study which analyzes the change in the market quality in both local markets would provide a complete picture of the effects of the policy.

Originality/value: Earlier studies documenting the effect of broker ID disclosure on market quality used effective spreads, market depth or order book imbalance as market quality measures. This study contributes to the existing literature by examining the changes in direct measures of the private information effect and liquidity effect of trades in a stock market – the Korean Stock Exchange – when the other part of the exchange (the KOSDAQ stock market) shifts to public broker ID transparency at the same transparency level.

Keywords: Transparency, Broker ID, Price impact, Liquidity

JEL Classification: G10, G15, G18

Suggested Citation

Pham, Thu Phuong, Broker ID Transparency and Price Impact of Trades: Evidence from the Korean Exchange (September 3, 2013). International Journal of Managerial Finance, Vol. 11 Iss: 1, pp.117 - 131 (2015), Available at SSRN: https://ssrn.com/abstract=2330054

Thu Phuong Pham (Contact Author)

University of Adelaide ( email )

10 Pulteney Street
Adelaide, South Australia 5005
Australia

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006
France

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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