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Rolling settlement and market liquidity

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  • Kyriacos Kyriacou
  • Bryan Mase

Abstract

This paper investigates the impact on UK stock and option markets of the change from an account based settlement system to a rolling settlement procedure. Such a change increases the transaction costs of short-term margin traders, and is likely to impact on the liquidity of the underlying market, as well as trading in the options market. Evidence is presented that the settlement procedure does impact on the liquidity of the market. Further, we find that rolling settlement increased market liquidity, consistent with the exit of margin traders as a result of the increase in short selling costs. Associated with this increase in liquidity is a significant reduction in nonoptionable stock trading volume, implying that margin trading may have been more prevalent in stocks without options. Finally, it is shown that while trading in stock options increased, the volatilities implied from call and put option prices indicate that put options have become relatively more expensive. This reflects the change in demand induced by the new settlement procedure, especially in terms of the increase in short selling costs.

Suggested Citation

  • Kyriacos Kyriacou & Bryan Mase, 2000. "Rolling settlement and market liquidity," Applied Economics, Taylor & Francis Journals, vol. 32(8), pages 1029-1036.
    • Handle: RePEc:taf:applec:v:32:y:2000:i:8:p:1029-1036
    DOI: 10.1080/000368400322084
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    Cited by:

    1. Azzopardi, Paul & Silvio John, Camilleri, 2003. "The Relevance of Short Sales to the Maltese Stock Market," MPRA Paper 84566, University Library of Munich, Germany.
    2. Yi-Mien Lin & Yun-Sheng Hsu & Shieh-Liang Chen, 2009. "Cash-flow news, market liquidity and liquidity risk," Applied Economics, Taylor & Francis Journals, vol. 41(9), pages 1137-1156.

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