1 / 46

Market Microstructure Daniel Sungyeon Kim

Market Microstructure Daniel Sungyeon Kim. Doidge , Karolyi , and Stulz. Foreign firms can cross-list in New York or London There is very robust competition to get cross-listings Q: So what exchanges can you cross-list on in these two cities ?. Market Shares: New York vs. London.

nakia
Download Presentation

Market Microstructure Daniel Sungyeon Kim

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Market MicrostructureDaniel Sungyeon Kim

  2. Doidge, Karolyi, and Stulz Foreign firms can cross-list in New York or London There is very robust competition to get cross-listings Q: So what exchanges can you cross-list on in these two cities?

  3. Market Shares: New York vs. London Q: What percentage of global cross-listings did New York and London have in 1998 and in 2005?

  4. A Popular Explanation • 2002 Sarbanes-Oxley Act (SOX) imposes severe costs on firms (costs = compliance requirements to assure effective management controls over reporting) •  new cross-listings avoided New York and went to London • Senator Paul Sarbanes Representative Michael Oxley

  5. Why Cross-list? Q: Why would a foreign firm want to cross-list anyway? In either location?

  6. Why Cross-list? • But still relevant up-to-the present is, governance benefit: • better protection of minority shareholders • backed by US law, enforced by SEC, monitored by analysts and institutional investors • vs. most countries do NOT protect minority shareholders •  controlling shareholder can rip-off minority shareholders

  7. Breaking out the Two London Exchanges • Main Market: 16%  11% • AIM: 0%  8% • AIM is only for small firms = don’t meet US listing requirements • US has improved its share of bigger firms compared to Main Market!

  8. Comparison of Listing Standards • US cross-listings: • List on an exchange  minority shareholder protection, US GAAP (high standard), and SOX since 2002 • Rule 144a or Over-The-Counter (OTC) (the later includes Pink Sheets and OTCBB)  very, very low standards • UK cross-listings: • Main Market Ordinary listing  no minority shareholder protection and International Accounting Standards (low) • Main Market Depositary receipt  no minority shareholder protection and no accounting requirement • List on AIM  very, very low standards  not a fair comparison to NYSE, AMEX, and NASDAQ

  9. Delistings • Delistings happen because the firm: • (1) voluntarily chooses to delist, • (2) is in a merger or acquisition, or • (3) fails to comply with listing requirements (e.g., due to a decline in profits or assets) • The next table contrasts New Listings vs. Delistings

  10. Propensity to Cross-list Over Time • Next they look at all factors that determine cross-listing • Firms= Universe of eligible firms to cross-list on Exchanges in US or Main Market in UK • Listed= Actual number of cross-listed • Actual percent = Listed / Firms • Estimate a model of the tendency to cross-list in 1990-2001 • Expected percent = predicted listings based on model

  11. Summary We should ignore AIM because it has much lower listing standards US exchanges are doing better than UK Main Market SOX is not hurting US

  12. Moulton and Wei They look at European firms listed on an European exchange and cross-listed on NYSE Q: What do they mean by overlapping hours vs. nonoverlapping hours?

  13. Stock Exchange Trading Hours • NYSE: 9:30 – 4:00 EST • London: 40 cross-listed, overlaps approx. 2 hours • Euronext: 39 cross-listed, overlaps approx. 2 hours • Etc.

  14. European Cross-list Stock Trading • Overlap = both exchanges open (e.g., 2 hours overlap between London & NYSE) • Vs. Nonoverlap = same # of hours on NYSE only (e.g., 2 hours on NYSE after London closes) • European = European stock that is cross-listed • Vs. US Match = US stock that is not cross-listed and is matched on price, volatility, and volume • Difference in Difference = (European Overlap – European Nonoverlap) – (US Overlap – US Nonoverlap) • This approach controls for time of day patterns unrelated to cross-listing

  15. European Cross-listed Stocks Trading on NYSE during European Exchange Holidays • A quick robustness check. This table looks at the opposite case, namely: Absence of European Competition = NYSE is open, but European Exchange is closed for holiday • Eur_Hols = Same Stocks that are Cross-listed in Europe, but European market is closed • US_Hols = Same US Match stocks • Again: Difference in Difference approach • Absence of European Competition All Diff in Diff are Insignificant = Approx. Zero Cross-listed stocks trade the same as US Match

  16. Summary  European Cross-listed difference in difference is due to competition during Overlapping hours We get the same results as in the options markets: More Competition Spreads < Less Competition Spreads

  17. Fernandes and Ferreira • Definition: Informativeness of a stock = degree to which information is impounded into the stock price • Stock returns generated by: • Market (systematic) information • Firm-specific (idiosyncratic) information • Q: If all investors have very little firm-specific info about a firm, what would drive it’s stock price?

  18. Informativeness Proxy Firm-specific Variance Ratio = (Firm-specific variance) / (market variance) Low variance ratio  low informativeness High variance ratio  high informativeness

  19. Hypothesis Prior studies have found: Emerging countries: low variance ratio  low informativeness Developed countries: high variance ratiohighinformativeness Hypothesis:They predict cross-listing in the US will cause the informativeness of a stock to increase

  20. Research Question What does the data show happens to the informativenessof a stock if it cross-lists in the US?

  21. Explanation for the Emerging Country Drop Authors explain it as a crowding-out effect: “More analyst coverage and more public information seems to actually deter some participants from collecting firm-specific information as well as reduce the active trading of informed traders.”

  22. Variance Ratio Around Cross-listing • Developed: 40% increase – half of the increase happens before the cross-listing in year 0! • Analyst coverage may increase before actual cross-listing • Emerging: 80% drop starting on year 0

  23. Summary Developed: Cross-listing increases informativeness Emerging: Cross-listing decreases or doesn’t change informativeness

  24. Boehmer, Saar, and Yu In January 2002, the NYSE creates OpenBook

  25. Managing Limit Order Exposure Q: How can you manage your limit order exposure?

  26. Analysis of Trading Strategies

  27. Summary Increase in transparency More use of limit orders Less use of floor brokers and specialists No drop in depth Effective spreads are down  Win for security traders

  28. Barclay and Hendershott • Traditional hours: 9:30 – 4:00 EST • Q: How can you trade 24-hours in stocks?

  29. After-hours Trading on NASDAQ

More Related