Levelling the Trading Field

48 Pages Posted: 5 Feb 2007 Last revised: 30 Jun 2013

David Easley

Cornell University - Department of Economics

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR)

Date Written: March 24, 2013

Abstract

We examine the impact on stock prices of a major upgrade to the New York Stock Exchange’s trading environment. The upgrade was sequentially implemented across groups of stocks. The upgrade improved information dissemination on the trading floor and reduced the latency in reporting trades and quotes. We show that the portion of the upgrade that reduced latency and transparency for electronic orders had significant impacts on liquidity, turnover, and returns. A portfolio that is long stocks undergoing the upgrade in the first 20 days of the upgrade process and short stocks receiving the upgrade later has a return of roughly three percent over the period, depending on the method of risk adjustment. This return differential is eliminated when all stocks are upgraded. We argue that the abnormal return was a priced effect of the improved liquidity produced by the upgrade.

Keywords: market structure, stock exchange, trading volume, transparency, information, latency, technology upgrade

JEL Classification: G12, G14

Suggested Citation

Easley, David and Hendershott, Terrence and Ramadorai, Tarun, Levelling the Trading Field (March 24, 2013). Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=961041 or http://dx.doi.org/10.2139/ssrn.961041

David Easley

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6283 (Phone)
607-255-2818 (Fax)

Terrence J. Hendershott

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Tarun Ramadorai (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Paper statistics

Downloads
1,206
Rank
12,589
Abstract Views
2,131