Trading Technology and Stock Market Liquidity: A Global Perspective
20 Pages Posted: 18 Dec 2006 Last revised: 9 Aug 2015
Date Written: December 18, 2006
We characterize the technological revolution that swept financial markets around the world and assess its profound effects. Computerization and satellite communication have transformed the industrial organization of stock exchanges and dramatically improved secondary market liquidity. Trading turnover has increased manifold and transaction costs have declined sharply due to advances in technology and an increase in number of stock market participants supplying liquidity. Greater liquidity in equities has made stocks a more attractive investment vehicle for investors thus lowering the cost of equity for listed companies. While technology has had profound positive effects for investors and companies, there have also been negative consequences associated with these innovations. We identify some determinants of these positive and negative variations in the effects of automation on liquidity.
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