Market Fairness and Efficiency: Evidence from the Tokyo Stock Exchange

62 Pages Posted: 28 Aug 2021 Last revised: 18 Oct 2021

See all articles by David Kemme

David Kemme

University of Memphis - Economics

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics

Jiang Zhang

University of St. Thomas - Opus College of Business

Date Written: August 26, 2021

Abstract

In 2015 the Tokyo Stock Exchange (TSE) implemented Arrowhead Renewal improvements (ARI) that reduced latency from about one millisecond to less than 0.5 milliseconds. Simultaneously, the ARI introduced new risk management functions to improve market fairness by reducing manipulative trading strategies. We find a dramatic improvement in market fairness as proxied by marking-the-close incidents, which declined by 61.19%. We find a much smaller improvement in market efficiency. Specifically, there was a reduction in the effective (quoted) spread of 6.45% (5.79%). The most dramatic improvement in market quality (fairness and efficiency) was for low-tick-size and high-market-capitalization stocks.

Keywords: Market fairness, Market efficiency, High-frequency trading, Liquidity, Tick size, Tokyo Stock Exchange

JEL Classification: G12, G14, G15, G28

Suggested Citation

Kemme, David M. and McInish, Thomas H. and Zhang, Jiang, Market Fairness and Efficiency: Evidence from the Tokyo Stock Exchange (August 26, 2021). Journal of Banking and Finance, Forthcoming, Darden Business School Working Paper No. 3912182, Available at SSRN: https://ssrn.com/abstract=3912182

David M. Kemme

University of Memphis - Economics ( email )

Memphis, TN 38152
United States
(901)678-5408 (Phone)
(901)678-2685 (Fax)

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States
901-678-4662 (Phone)
901-678-3006 (Fax)

Jiang Zhang (Contact Author)

University of St. Thomas - Opus College of Business

2115 Summit Ave.
St. Paul, MN 55015
United States

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