A Tale of Three Cities: Is an Electronic Public Order Book Appropriate for Transition Economies?

44 Pages Posted: 18 Dec 2000

See all articles by Joseph P. Kairys, Jr.

Joseph P. Kairys, Jr.

Vytautas Magnus University

Raimonds Kruza

Stockholm School of Economics; Riga Stock Exchange

Ritvars Kumpins

Parex Bank Corporation

Date Written: November 1999

Abstract

Computerized order-driven trading systems have proven highly successful in developed market economies with deep and liquid markets, but is an electronic public order book the best choice for a transition economy? We examine the experience of three newly created stock exchanges in the formerly planned economies of Poland, Lithuania, and Latvia, each of which adopted an electronic public order book developed in co-operation with the Paris Bourse. The exchanges in Warsaw, Vilnius, and Riga have followed a similar pattern of development from a single-price call auction once a week, to daily call auctions, to the introduction of continuous variable price trading using a public order book using state-of-the-art technologies. We find that only Warsaw has successfully concentrated liquidity in a single-price call auction, while in both Vilnius and Riga, the order books are largely empty for the majority of listed securities. An examination of trading by market segments reveals that Warsaw trades the bulk of its shares in the single-price call auction, block trades predominate in Vilnius, while continuous variable price trading accounts for most of the turnover in Riga. We observe sharply divergent results in both how shares are traded, as well as in the level of economic "function" achieved by the exchanges. Our findings suggest a set of "necessary" conditions in order for an order-driven trading system to succeed in a transition economy environment. Careful attention must be paid to listing requirements, price fluctuation limits and the minimum size of trades, the provision of liquidity, and tick size, so that the intended "function" of the electronic public order book is realized.

Keywords: Emerging markets, market microstructure, liquidity, trading systems

JEL Classification: G15; G12: G14: G18

Suggested Citation

Kairys, Joseph P. and Kruza, Raimonds and Kumpins, Ritvars, A Tale of Three Cities: Is an Electronic Public Order Book Appropriate for Transition Economies? (November 1999). EFMA 2000 Athens. Available at SSRN: https://ssrn.com/abstract=251406 or http://dx.doi.org/10.2139/ssrn.251406

Joseph P. Kairys (Contact Author)

Vytautas Magnus University ( email )

S. Daukanto 28
Faculty of Business and Management
LT-3000, Kaunas
Lithuania

Raimonds Kruza

Stockholm School of Economics ( email )

P.O. Box 6501
Stockholm
SWEDEN

Riga Stock Exchange

Doma Laukums 6
Riga. LV-1885
Latvia

Ritvars Kumpins

Parex Bank Corporation ( email )

3 Smilshu iela
Riga
Latvia
+371 945 0823 (Phone)
+371 701 0185 (Fax)

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