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Speed of convergence to market efficiency: The role of ECNs

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  • Chung, Dennis Y.
  • Hrazdil, Karel

Abstract

Chordia, Roll and Subrahmanyam (2005, CRS) estimate the speed of convergence to market efficiency based on short-horizon return predictability of the 150 largest NYSE firms. We extend CRS to a broad panel of NYSE stocks and are the first to examine the relation between electronic communication networks (ECNs) and the corresponding informational efficiency of prices. Overall, we confirm CRS's result that price adjustments to new information occur on average within 5–15min for large NYSE stocks. We further show that it takes about 20min longer for smaller firms to incorporate information into prices. Most importantly, we demonstrate that the speed of convergence to market efficiency is significantly related to the type of trading platform where orders are executed, even after controlling for relative order flows, trading costs, volatility, informational effects, trading conditions, market quality, institutional trading activity, and other firm-specific characteristics. Our findings provide direct answers and insights to issues raised in a recent SEC concept release document.

Suggested Citation

  • Chung, Dennis Y. & Hrazdil, Karel, 2012. "Speed of convergence to market efficiency: The role of ECNs," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 702-720.
    • Handle: RePEc:eee:empfin:v:19:y:2012:i:5:p:702-720
    DOI: 10.1016/j.jempfin.2012.08.006
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    3. Ben Omrane, Walid & Welch, Robert, 2016. "Tick test accuracy in foreign exchange ECN markets," Research in International Business and Finance, Elsevier, vol. 37(C), pages 135-152.
    4. Chen, Jian & Haboub, Ahmad & Khan, Ali, 2024. "Limits of arbitrage and their impact on market efficiency: Evidence from China," Global Finance Journal, Elsevier, vol. 59(C).

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    More about this item

    Keywords

    ECN; Speed; Market efficiency; NYSE; Arca;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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