Institutional Design and Liquidity at Stock Exchanges Around the World

47 Pages Posted: 13 Dec 2005

See all articles by Pankaj K. Jain

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Date Written: December 2003

Abstract

The paper investigates the trading mechanism and other structural features of 51 stock exchanges and analyzes the impact of these institutional characteristics on liquidity measures such as closing bid-ask spreads, volatility and trading turnover. Exchange-design features such as narrower tick sizes, designated market makers, consolidated limit order books, hybrid trading mechanisms, automated trade execution, consolidated order-flow, and better shareholder rights are associated with lower spreads. These features also influence volatility and trading turnover, which in turn further affect spreads. Overall liquidity is highest on hybrid trading mechanisms compared to pure limit order books or quote-based dealer system because the former have two sources of liquidity. These results have important implications for investors' trading strategy, firms' listing strategy, and exchanges' organizational strategy.

Keywords: financial market design, stock exchange, liquidity, bid-ask spread

JEL Classification: G10, G15, G19, G20

Suggested Citation

Jain, Pankaj K., Institutional Design and Liquidity at Stock Exchanges Around the World (December 2003). Available at SSRN: https://ssrn.com/abstract=869253 or http://dx.doi.org/10.2139/ssrn.869253

Pankaj K. Jain (Contact Author)

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

Memphis, TN 38152
United States

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