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Sunshine Trading in an African Stock Market

Author

Listed:
  • Sébastien Pouget

    (CRM - Centre de Recherche en Management - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - IAE - Institut d'Administration des Entreprises - Toulouse - CNRS - Centre National de la Recherche Scientifique)

  • Marguerite Dia

Abstract

Purpose - How is liquidity formed in emerging financial markets? Do traders preannounce their orders to attract outside liquidity providers (a practice referred to as sunshine trading)? The purpose of this paper is to study liquidity formation of infrequently traded stocks. It also investigates the role of preopening periods in the formation of liquidity. Design/methodology/approach - The paper focuses on the eight largest stocks traded on the West African Bourse in 2000. The dataset includes all the orders submitted to the market from January 3 to December 13, including their time of placement, limit price, and proposed quantity, and the identity of the broker-dealers who submitted them. The paper analyzes order placement strategies as well as preopening price efficiency and broker-dealers' profits. Findings - The evidence is consistent with broker-dealers engaging in sunshine trading. First, large orders are placed early during the preopening period and are not cancelled. Second, for most of the stocks in our sample, preopening prices reveal information long before trading actually occurs. Third, large volumes are traded without significant price movements. Fourth, the most active brokers' profits are lower than less significant intermediaries' ones, indicating that the former do not manipulate the market. Practical implications - The analysis suggests that the actual liquidity on the West African Bourse is higher than what is indicated by the average state of the order book. This might increase the attractiveness of African stock markets for global portfolio managers. Originality/value - To the best of the authors' knowledge, this paper is the first to empirically study sunshine trading as theoretically analyzed by Admati and Pfleiderer

Suggested Citation

  • Sébastien Pouget & Marguerite Dia, 2011. "Sunshine Trading in an African Stock Market," Post-Print halshs-00738418, HAL.
    • Handle: RePEc:hal:journl:halshs-00738418
    DOI: 10.1108/03074351111113315
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    Citations

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    Cited by:

    1. de Frutos, M. Ángeles & Manzano, Carolina, 2014. "Market transparency, market quality, and sunshine trading," Journal of Financial Markets, Elsevier, vol. 17(C), pages 174-198.
    2. Suther, Sandra & Battle, Arrie M. & Battle-Jones, Felecia & Seaborn, Cynthia, 2016. "Utilizing health ambassadors to improve type 2 diabetes and cardiovascular disease outcomes in Gadsden County, Florida," Evaluation and Program Planning, Elsevier, vol. 55(C), pages 17-26.
    3. Selma Boussetta, 2017. "The role of pre-opening mechanisms in fragmented markets," Post-Print hal-02156145, HAL.
    4. Silvio John Camilleri, 2015. "The Impact of Stock Market Structure on Volatility: Evidence from a Call Auction Suspension," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 6(2), pages 44-53, April.
    5. Camilleri, Silvio John, 2015. "Do call auctions curtail price volatility? Evidence from the National Stock Exchange of India," MPRA Paper 95301, University Library of Munich, Germany.
    6. Johannes A. Skjeltorp & Elvira Sojli & Wing Wah Tham, 2011. "Sunshine trading: Flashes of trading intent at the NASDAQ," Working Paper 2011/17, Norges Bank.
    7. Laurence Lescourret, 2017. "Cold Case File? Inventory Risk and Information Sharing during the pre†1997 NASDAQ," European Financial Management, European Financial Management Association, vol. 23(4), pages 761-806, September.
    8. Jieying Hong & Sébastien Pouget, 2021. "Liquidity Formation and Preopening Periods in Financial Markets," Economica, London School of Economics and Political Science, vol. 88(351), pages 697-723, July.

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