IDEAS home Printed from https://ideas.repec.org/a/bla/eufman/v11y2005i3p387-424.html
   My bibliography  Save this article

Noise and the Trading Mechanism: the Case of SETS

Author

Listed:
  • Patricia Chelley‐Steeley

Abstract

On 20 October 1997 the London Stock Exchange introduced a new trading system called SETS. This system was to replace the dealer system SEAQ, which had been in operation since 1986. Using the iterative sum of squares test introduced by Inclan and Tiao (1994), we investigate whether there was a change in the unconditional variance of opening and closing returns, at the time SETS was introduced. We show that for the FTSE‐100 stocks traded on SETS, on the days following its introduction, there was a widespread increase in the volatility of both opening and closing returns. However, no synchronous volatility changes were found to be associated with the FTSE‐100 index or FTSE‐250 stocks. We conclude therefore that the introduction of the SETS trading mechanism caused an increase in noise at the time the system was introduced.

Suggested Citation

  • Patricia Chelley‐Steeley, 2005. "Noise and the Trading Mechanism: the Case of SETS," European Financial Management, European Financial Management Association, vol. 11(3), pages 387-424, June.
    • Handle: RePEc:bla:eufman:v:11:y:2005:i:3:p:387-424
    DOI: 10.1111/j.1354-7798.2005.00289.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1354-7798.2005.00289.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1354-7798.2005.00289.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Biais, Bruno, 1993. "Price Information and Equilibrium Liquidity in Fragmented and Centralized Markets," Journal of Finance, American Finance Association, vol. 48(1), pages 157-185, March.
    2. Jason T. Greene & Susan G. Watts, 1996. "Price Discovery on the NYSE and the NASDAQ: The case of Overnight Daytime News Releases," Financial Management, Financial Management Association, vol. 25(1), Spring.
    3. Aggarwal, Reena & Inclan, Carla & Leal, Ricardo, 1999. "Volatility in Emerging Stock Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(1), pages 33-55, March.
    4. Amihud, Yakov & Mendelson, Haim, 1980. "Dealership market : Market-making with inventory," Journal of Financial Economics, Elsevier, vol. 8(1), pages 31-53, March.
    5. John Board & Charles Sutcliffe, 1996. "Trade Transparency and the London Stock Exchange," European Financial Management, European Financial Management Association, vol. 2(3), pages 355-365, November.
    6. Paul Kofman & James T. Moser, 1995. "Spreads, information flows and transparency across trading systems," Working Paper Series, Issues in Financial Regulation 95-1, Federal Reserve Bank of Chicago.
    7. Madhavan, Ananth, 1992. "Trading Mechanisms in Securities Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 607-641, June.
    8. Amihud, Yakov & Mendelson, Haim, 1991. "Volatility, Efficiency, and Trading: Evidence from the Japanese Stock Market," Journal of Finance, American Finance Association, vol. 46(5), pages 1765-1789, December.
    9. Nicholas Taylor, 2002. "Competition on the London Stock Exchange," European Financial Management, European Financial Management Association, vol. 8(4), pages 399-419, December.
    10. Handa, Puneet & Schwartz, Robert A, 1996. "Limit Order Trading," Journal of Finance, American Finance Association, vol. 51(5), pages 1835-1861, December.
    11. French, Kenneth R. & Roll, Richard, 1986. "Stock return variances : The arrival of information and the reaction of traders," Journal of Financial Economics, Elsevier, vol. 17(1), pages 5-26, September.
    12. Cohen, Kalman J & Maier, Steven F & Schwartz, Robert A & Whitcomb, David K, 1981. "Transaction Costs, Order Placement Strategy, and Existence of the Bid-Ask Spread," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 287-305, April.
    13. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 225-234, April.
    14. Ronen, Tavy, 1998. "Trading structure and overnight information: A natural experiment from the Tel-Aviv Stock Exchange," Journal of Banking & Finance, Elsevier, vol. 22(5), pages 489-512, May.
    15. Harrison Hong & Jiang Wang, 2000. "Trading and Returns under Periodic Market Closures," Journal of Finance, American Finance Association, vol. 55(1), pages 297-354, February.
    16. Amihud, Yakov & Mendelson, Haim, 1987. "Trading Mechanisms and Stock Returns: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 42(3), pages 533-553, July.
    17. Stoll, Hans R & Whaley, Robert E, 1990. "Stock Market Structure and Volatility," The Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 37-71.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chelley-Steeley, Patricia & Siganos, Antonios, 2008. "Momentum profits in alternative stock market structures," Journal of Multinational Financial Management, Elsevier, vol. 18(2), pages 131-144, April.
    2. Chelley-Steeley, Patricia L., 2008. "Market quality changes in the London Stock Market," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2248-2253, October.
    3. Angelidis, Timotheos & Andrikopoulos, Andreas, 2010. "Idiosyncratic risk, returns and liquidity in the London Stock Exchange: A spillover approach," International Review of Financial Analysis, Elsevier, vol. 19(3), pages 214-221, June.
    4. Andrikopoulos, Andreas, 2015. "Truth and financial economics: A review and assessment," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 186-195.
    5. Chelley-Steeley, Patricia, 2009. "Price synchronicity: The closing call auction and the London stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(5), pages 777-791, December.
    6. Patricia Chelley Steeley & Brian Lucey, 2008. "The Microstructure of the Irish Stock Market," Multinational Finance Journal, Multinational Finance Journal, vol. 12(3-4), pages 279-311, September.
    7. Chung, Huimin & Sheu, Her-Jiun & Hsu, Shufang, 2010. "Trading platform, market volatility and pricing efficiency in the floor-traded and E-mini index futures markets," International Review of Economics & Finance, Elsevier, vol. 19(4), pages 742-754, October.
    8. Liao, Huei-Chu & Lee, Yi-Huey & Suen, Yu-Bo, 2008. "Electronic trading system and returns volatility in the oil futures market," Energy Economics, Elsevier, vol. 30(5), pages 2636-2644, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Patricia Chelley Steeley & Brian Lucey, 2008. "The Microstructure of the Irish Stock Market," Multinational Finance Journal, Multinational Finance Journal, vol. 12(3-4), pages 279-311, September.
    2. Chelley-Steeley, Patricia, 2005. "Explaining volatility and serial correlation in opening and closing returns: A study of the FT-30 components," Global Finance Journal, Elsevier, vol. 16(1), pages 1-15, August.
    3. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2005. "Market microstructure: A survey of microfoundations, empirical results, and policy implications," Journal of Financial Markets, Elsevier, vol. 8(2), pages 217-264, May.
    4. Chelley-Steeley, Patricia, 2003. "The trading mechanism, cross listed stocks: a comparison of the Paris Bourse and SEAQ-International," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(4), pages 401-417, October.
    5. Rosita P. Chang & Shuh‐Tzy Hsu & Nai‐Kuan Huang & S. Ghon Rhee, 1999. "The Effects of Trading Methods on Volatility and Liquidity: Evidence from the Taiwan Stock Exchange," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(1‐2), pages 137-170, January.
    6. Hu, Shing-yang, 2006. "A simple estimate of noise and its determinant in a call auction market," International Review of Financial Analysis, Elsevier, vol. 15(4-5), pages 348-362.
    7. Sioud Olfa Benouda & Mezzez Hmaied Dorra, 2003. "The Effects of Automation on Liquidity, Volatility, Stock Returns and Efficiency: Evidence from the Tunisian Stock Market," Review of Middle East Economics and Finance, De Gruyter, vol. 1(2), pages 43-56, August.
    8. George, Thomas J & Hwang, Chuan-Yang, 2001. "Information Flow and Pricing Errors: A Unified Approach to Estimation and Testing," The Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 979-1020.
    9. Lang, Larry H. P. & Lee, Yi Tsung, 1999. "Performance of various transaction frequencies under call markets: The case of Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 7(1), pages 23-39, February.
    10. Bildik, Recep, 2001. "Intra-day seasonalities on stock returns: evidence from the Turkish Stock Market," Emerging Markets Review, Elsevier, vol. 2(4), pages 387-417, December.
    11. Rosita P. Chang & Shuh-Tzy Hsu & Nai-Kuan Huang & S. Ghon Rhee, 1999. "The Effects of Trading Methods on Volatility and Liquidity: Evidence from the Taiwan Stock Exchange," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(1-2), pages 137-170.
    12. Theobald, Michael & Yallup, Peter, 2005. "Intradaily volatility and adjustment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(5), pages 407-424, December.
    13. Goodhart, Charles A. E. & O'Hara, Maureen, 1997. "High frequency data in financial markets: Issues and applications," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 73-114, June.
    14. Chow, Edward H. & Lee, Jie-Haun & Shyy, Gang, 1996. "Trading mechanisms and trading preferences on a 24-hour futures market: A case study of the Floor/GLOBEX switch on MATIF," Journal of Banking & Finance, Elsevier, vol. 20(10), pages 1695-1713, December.
    15. Patricia Chelley-Steeley, 2001. "Opening Returns, Noise, And Overreaction," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 24(4), pages 513-521, December.
    16. Silvio John Camilleri & Christopher J. Green, 2009. "The impact of the suspension of opening and closing call auctions: evidence from the National Stock Exchange of India," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 1(3), pages 257-284.
    17. Semenov, Andrei, 2015. "The small-cap effect in the predictability of individual stock returns," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 178-197.
    18. Ahn, Hee-Joon & Cai, Jun & Hamao, Yasushi & Ho, Richard Y. K., 2002. "The components of the bid-ask spread in a limit-order market: evidence from the Tokyo Stock Exchange," Journal of Empirical Finance, Elsevier, vol. 9(4), pages 399-430, November.
    19. Chung, Kee H. & Van Ness, Bonnie F. & Van Ness, Robert A., 1999. "Limit orders and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 53(2), pages 255-287, August.
    20. Ronen, Tavy, 1998. "Trading structure and overnight information: A natural experiment from the Tel-Aviv Stock Exchange," Journal of Banking & Finance, Elsevier, vol. 22(5), pages 489-512, May.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:eufman:v:11:y:2005:i:3:p:387-424. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/efmaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.