Market Liquidity and the Impacts of the Computerized Trading System: Evidence from the Stock Exchange of Thailand

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1 36 Invesmen Managemen and Financial Innovaions, 4/4 Marke Liquidiy and he Impacs of he Compuerized Trading Sysem: Evidence from he Sock Exchange of Thailand Sorasar Sukcharoensin 1, Pariyada Srisopisawa, Somsak Chuenji Absrac This paper sudies he impacs of he compuerized rading sysem on he marke liquidiy in he Sock Exchange of Thailand (SET). The findings sugges ha he auomaed rading sysem accomplishes is mission of increasing volume; however, i fails o reduce he asymmeric informaion among marke paricipans. This may in general sugges ha auomaion improves he rading efficiency and lowers he ransacion coss. On he oher hand, i fails o improve informaion asymmery as he compuerized rading sysem is ouweighed by he informaion loss from he floor sysem. JEL Classificaion: G1; G14 Key words: Marke Liquidiy; Securiies marke; Sock exchange; Trading sysem; Bid/Ask spread. 1. Inroducion The Sock Exchange of Thailand (SET) has changed is rading sysem from a sequenial open aucion sysem o a compuerized rading sysem in One of he appealing feaures of he compuerized rading is ha i offers ransparency o he sysem, as is he marke informaion ha hey make available. Theoreically, he compuerized rading sysem should provide all marke paricipans wih he equal opporuniies o he same se of informaion, improve he rading efficiency, lower he ransacion coss, as well as increase marke liquidiy. However, he compuerized sysem is someimes designed o provide only a specific se of informaion o he marke paricipans on compuer erminal and, ineviably, ha informaion se is oo limied. Therefore, here are some cases ha less amoun of informaion are available for invesors o rade. As a resul, he auomaion may hur he rading volume. The key is which informaion se ouweighs he oher and, as a resul, has more impac on he rading behavior as we use volume and bid/ask spread as our proxy for liquidiy disribuion in he Sock Exchange of Thailand (SET). We hypohesize ha here should be an increase in rading volume and a narrower bid/ask spread afer inroducing such a floorless equiy rading sysem. The evidence suggess ha here is a significan increase in rading volume, bu he bid/ask spread is wider in he course of he sudy period. The res of he paper is organized as follows. Secion presens he auomaed rading environmen in Thailand. Secion 3 provides lieraure surveys of he compuerized rading sysem and is impacs. Secion 4 discusses he daa and sample design. Secion 5 presens he empirical resuls and he las secion concludes he sudy.. The Auomaed Sysem for he Sock Exchange of Thailand (ASSET) In May 1991, he Sock Exchange of Thailand has changed is rading sysem from he radiional floor rading sysem o he coninuous compuerized rading sysem. All rade and flow of informaion were o be processed elecronically hrough erminals of he compuerized order processing sysem: The Auomaed Sysem of he Sock Exchange of Thailand, shorly, he ASSET. The new sysem which is he compuerized rading is designed o improve he efficiency of he rading mechanism. The ASSET provides efficiency in securiies rading in erms of capaciy and speed of execuion of orders. I can execue more han 1, ransacions per hour wihou human inerference a high speed. 1 Graduae Program in Adminisraion Technology and Training Cener, Naional Insiue of Developmen Adminisraion, Thailand. See Sock Exchange of Thailand (1991), Sahasakul (1993), and Ganhavorn (1994) for more deails abou he ASSET.

2 Invesmen Managemen and Financial Innovaions, 4/4 37 ASSET also provides he same informaion disclosure o all brokers and invesors. For example, everyone sees only he op hree bid and ask price levels. The informaion asymmery beween invesors, who ge access o he rading floor, insiders, and he uninformed raders, is, herefore, reduced. However, wheher he sysem accomplishes is missions is ruly an empirical quesion. 3. Lieraure Reviews 3.1. Impacs of he compuerized rading sysem The advanages of he auomaed rading sysem over he radiional floor-ype rading mechanism are lower informaional asymmery, more volume rading, and narrower he bid/ask spreads. Glen (1994) emphasizes he imporan role of he exen o which he informaion is dispersed among marke paricipans. The compuerized order processing permis dispersion of informaion equally across invesors so ha he differences in informaion available o invesor groups are reduced subsanially. This implies ha rading volume should be improved and he bid/ask spread should be narrower. Hedvall (1996) conends ha he auomaed rading sysem increases he rading volume and reduces he bid/ask spread in he Helsinki Sock Exchange (HETI) due o lower asymmeric informaion, when compared o he radiional floor rading sysem. This is acceleraed by ime efficiency in processing orders and he informaion services ha remendously faciliae he rading volume. However, floor raders claim ha informaion is los by moving from he rading floor o he anonymiy of a compuer erminal 1. On he floor, raders have o develop a repuaion for honesy in heir dealings ha may make hem less likely aemp o conduc rades a he expense of uninformed colleagues. Such is no he case wih compuerized sysems, where repuaion can be los as a conrol facor, and informed raders can ake advanage of he uninformed raders. Therefore, here are wo issues here, he benefi from less informaion asymmery vis-à-vis he cos of having less rading informaion. The key is which informaion se ouweighs he oher and, as a resul, has more impac on he rading behavior as we use volume and bid/ask spread as our proxy for liquidiy disribuion in he SET 3. In oher words, if he compuerized rading offers less informaion asymmery, and provides sufficien amoun of informaion for rading, given ha all marke paricipans can absorb he echnology insananeously, he liquidiy in he marke should improve. 3.. Measure of marke liquidiy Volume Unexpeced rading volume was used as early as Beaver (1968) as a measure of informaion conen. More recenly, many sudies have used unexpeced rading volume besides unexpeced price changes o es informaion conen of some paricular announcemen of some evens such as earnings announcemens and annual repors or he changing of he rading sysem. Compuerized rading sysem provides efficiency in reporing he limi orders o he paricipans and reduces he execuion and waiing ime which, in urn, increases he rading volume Bid/ask spread and is componens Compuerized rading sysem benefis he bid/ask spread by narrowing down he informaion gap beween raders having superior informaion and he ones wihou i. Changing he rading sysem in he SET will offer a more efficien flow of he informaion o uninformed invesors. This reducion of informaion asymmery decreases he bid/ask spreads because he informed raders and uninformed ones are using similar informaion se. The size of he spread is reduced because managers, securiy dealers, liquidiy raders, and informaion raders are now uilizing more symmeric informaion se (Glosen and Milgrom, 1985). 1 See Glen (1994) for more deails. For example, informed raders can inenionally place conceived orders for a purpose of o lead or o dump a paricular sock or marke, hen cancel as when hese orders ge closer o he execuion queue. 3 There are also oher candidaes for liquidiy disribuion such as median daily volume, he number of rading days, days wih a spread esablished, and he number of rade per day (Hedvall, 1996). However, he only wo available informaion in SET are bid/ask spread and he rading volume.

3 38 Invesmen Managemen and Financial Innovaions, 4/4 In his paper, he bid/ask spread reacion o he announcemen of changing from he radiional floor rading sysem o he compuerized rading sysem for he SET is esed. Bid/ask prices are changed o reflec less asymmeric informaion conveyed by auomaion in rading. We expec o find a significan change in he proporional bid/ask spread following he inroducion of compuerized rading sysem in he SET. 4. Daa and Mehodology 4.1. Daa All informaion are gahered from he daily quoaion of he SET during he period from April 16, 1991 o June 18, 1991 for samples from finance and securiies secor and from April 9, 1991 o July, 1991 for all secors sample, excluding finance and securiies secor. The quoaion documens closing bid/ask prices, closing execuion prices, high/low execuion prices during each rading days, oal volume raded (boh in shares and in bah). We define he even dae as he day he compuerized rading is implemened. The sample consiss of 1 days before and afer he even dae. We have classified hem ino he esimaion period and he even period. The esimaion period is defined as he period covering from = -1 o -6 and he even period covers from = -5 o 1; where = represens he day ha he compuerized rading is applied. There are wo differen implemening even daes wih he compuerized rading sysem, we have o separae he observaions ino wo groups. The firs group is he finance and securiies secor in which he compuerized rading is implemened on May 17, The second group conains all oher companies excluding hose in he finance and securiies group. This laer group has he even dae on May 31, Mehodology The analysis proceeds as follows. Firs, he behavior of he bid/ask spread and he rading volume are examined when auomaing he sock rading sysem a he SET. Tess for differences in volume and bid/ask spread are conduced, for he period of before and afer he inroducion of he compuerized rading sysem. The proporional bid/ask spread is calculaed as follows: PS Ask Ask Bid Bid, (1) where PS = Proporional spread of sock i on day, Ask = Ask price of sock i on day, Bid = Bid price of sock i on day, = Sample period covering from = -1 o 1. For he invesigaion on he bid/ask spread, here are wo approaches employed in his sudy, Charoenwong (1994) and Forjan and McCorry (1995). These wo approaches are quie similar excep for he sandardized abnormal proporional spread of he former mehodology. Firs, following Charoenwong (1994), we calculae he mean of he proporional spread of sock i during he esimaion period for he comparison afer calculaing he proporional spread. Nex, for he even period, he sandardized abnormal spread of sock i on day is calculaed as follows: where SAPS PS 1, () 1 SAPS = Sandardized abnormal proporional spread of sock i on day,

4 Invesmen Managemen and Financial Innovaions, 4/4 39 PS = Proporional spread of sock i on day, 1 = Sample mean of proporional spread of sock i during 1, 1 = Sample sandard deviaion of proporional spread of sock i during 1, 1 = Esimaion period covering from = -1 o -6, = Even period covering from = -5 o 1. Then, he mean sandardized abnormal proporional spread on day can be obained by averaging he sandardized abnormal proporional spread across all securiies. where MSAPS N SAPS i 1 N, (3) MSAPS = Mean sandardized abnormal proporional spread on day, N = Number of socks. So, he z-saisics is calculaed o assess he saisical significance of he mean sandardized abnormal proporional spread using he following saisic: z MSAPS N. (4) For he second approach, we follow Forjan and McCorry (1995). The differences from he firs one are, firs, we do no sandardize he abnormal proporional spread here, and, second, we use -saisics insead of z-saisics as recommended in he lieraure. The following equaions are applied in he second approach: PS APS MAPS Ask Ask Bid Bid 1, PS, (5) N APS i 1 MAPS MAPS where PS = Proporional spread of sock i on day, Ask = Ask price of sock i on day, Bid = Bid price of sock i on day, = Sample period covering from = -1 o 1, APS = Abnormal proporional spread of sock i on day, PS = Proporional spread of sock i on day, 1 = Sample means of proporional spread of sock i during 1, 1 = Esimaion period covering from = -1 o -6, = Even period covering from = -5 o 1, N, (6), (7)

5 4 Invesmen Managemen and Financial Innovaions, 4/4 MAPS = Mean abnormal proporional spread on day, N = Number of socks, = Sandard deviaion of mean abnormal proporional spread during. MAPS 5. Empirical Resuls Figures 1 and presen he average daily rading volume for he wo groups. Afer he inroducion of compuerized rading of finance socks, volumes for finance and securiies socks have increased sharply bu overall volumes have no increased Trading Volume (Shares) Day relaive o he Inroducion of ASSET Fig. 1. Trading Volume for Finance and Securiies Secor This figure presens he average daily rading volume for Finance and Securiies secor. The even dae ( = ) is he day he compuerized rading is implemened. The sample consiss of 1 days before and afer he even dae Trading Volume (Shares) Day relaive o he Inroducion of ASSET Fig.. Trading Volume for All Secors (excluding Finance and Securiies) This figure presens he average daily rading volume for all secors (excluding Finance and Securiies). The even dae ( = ) is he day he compuerized rading is implemened. The sample consiss of 1 days before and afer he even dae. For he finance and securiies secor, he proporional bid/ask spread has increased dramaically on he even dae and says a he approximae level for a while. In addiion, afer an inroducion of he compuerized rading sysem o all socks, he proporional bid/ask spread has sharply widened on he even dae and remains so for he res of he sample period. These are shown in Figures 3 and 4.

6 Invesmen Managemen and Financial Innovaions, 4/ Proporional Spread Day relaive o he Inroducion of ASSET Fig. 3. Proporional Bid/Ask Spread for Finance and Securiies Secor This figure presens he proporional bid/ask spread for Finance and Securiies secor. The even dae ( = ) is he day he compuerized rading is implemened. The sample consiss of 1 days before and afer he even dae Proporional Spread Day relaive o he Inroducion of ASSET Fig. 4. Proporional Bid/Ask Spread for All Secors (excluding Finance and Securiies) This figure presens he proporional bid/ask spread for all secors (excluding Finance and Securiies). The even dae ( = ) is he day he compuerized rading is implemened. The sample consiss of 1 days before and afer he even dae. These resuls are inconsisen wih he microsrucure heory ha he bid/ask spread should reduce afer such even. From he echnical viewpoin, all brokers and invesors need some imes o learn and cach up wih he new sysem. In oher words, hough here were all informaion available on screen, bu hese reail invesors could no uilize hem efficienly. Therefore, i is probably he case ha he reail invesors could no benefi from less asymmeric informaion among marke paricipans, creaed by he new rading sysem, and even worse, hey could no ge informaion he way hey used o. This is evidenced by higher proporional spread during his ime. Nex, he deviaion of he percenage spread during he even period from he mean of he esimaion period is calculaed. There are wo approaches employed in his paper which are Charoenwong (1994) and Forjan and McCorry (1995). The resuls for finance and securiies secor are presened in Table 1 and Figure 5.

7 4 Invesmen Managemen and Financial Innovaions, 4/4 Table 1 Mean Sandardized Abnormal Proporional Spread and Mean Abnormal Proporional Spread of Finance and Securiies Secor This able presens he Mean Sandardized Abnormal Proporional Spread (MSAPS) and he Mean Abnormal Proporional Spread (MAPS) of Finance and Securiies secor. The even dae ( = ) is he day he compuerized rading is implemened. The sample consiss of 1 days before and afer he even dae. Dae Approach 1 Approach MSAPS z-saisics MAPS -saisics Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr ** Apr * May May May ** May May May *** May *** May May May May *** * -May *** * 1-May *** * -May *** ** 3-May May *** * 7-May *** *** 9-May *** * 3-May *** May Jun ** Jun *** ***

8 Invesmen Managemen and Financial Innovaions, 4/4 43 Table 1 (coninuous) Jun *** Jun Jun Jun * Jun *** * 1-Jun *** Jun *** Jun ** Jun Jun *** * ***, **, and * denoe significance a he.1,.5, and.1 levels, respecively..6.4 Mean Sandardized Abnormal Proporional Spread (MSAPS) Day relaive o he Inroducion of ASSET Fig. 5a. Mean Sandardized Abnormal Proporional Spread (MSAPS).3.5 Mean Abnormal Proporional Spread (MAPS) Day relaive o he Inroducion of ASSET Fig. 5b. Mean Abnormal Proporional Spread (MSAPS) Fig. 5. Mean Sandardized Abnormal Proporional Spread and Mean Abnormal Proporional Spread of Finance and Securiies Secor

9 44 Invesmen Managemen and Financial Innovaions, 4/4 This figure presens he Mean Sandardized Abnormal Proporional Spread (MSAPS) and he Mean Abnormal Proporional Spread (MAPS) of Finance and Securiies secor. The even dae ( = ) is he day he compuerized rading is implemened. The sample consiss of 1 days before and afer he even dae. Table and Figure 6 show he resuls for all secors excluding he finance and securiies. Table Mean Sandardized Abnormal Proporional Spread and Mean Abnormal Proporional Spread of All Secors (excluding Finance and Securiies) This able presens he Mean Sandardized Abnormal Proporional Spread (MSAPS) and he Mean Abnormal Proporional Spread (MAPS) of all secors (excluding Finance and Securiies). The even dae ( = ) is he day he compuerized rading is implemened. The sample consiss of 1 days before and afer he even dae. Dae Approach 1 Approach MSAPS z-saisics MAPS -saisics Apr Apr May ** May May May May May May May * May May May * May May ** May * May *** May May *** May ** May ** May *** * 3-Jun *** * 4-Jun *** * 5-Jun *** Jun *** Jun *** Jun *** * 11-Jun *** Jun *** Jun ***

10 Invesmen Managemen and Financial Innovaions, 4/4 45 Table (coninuous) Jun *** * 17-Jun *** Jun *** Jun *** * -Jun *** *** 1-Jun *** * 4-Jun *** ** 5-Jun *** *** 6-Jun *** ** 7-Jun *** Jun *** * -Jul *** *** ***, **, and * denoe significance a he.1,.5, and.1 levels, respecively Mean Sandardized Abnormal Proporional Spread (MSAPS) Day relaive o he Inroducion of ASSET Fig. 6a. Mean Sandardized Abnormal Proporional Spread (MSAPS) Mean Abnormal Proporional Spread (MAPS) Day relaive o he Inroducion of ASSET Fig. 6b. Mean Abnormal Proporional Spread (MSAPS) Fig. 6. Mean Sandardized Abnormal Proporional Spread and Mean Abnormal Proporional Spread of All Secors (excluding Finance and Securiies)

11 46 Invesmen Managemen and Financial Innovaions, 4/4 This figure presens he Mean Sandardized Abnormal Proporional Spread (MSAPS) and he Mean Abnormal Proporional Spread (MAPS) of all secors (excluding Finance and Securiies). The even dae ( = ) is he day he compuerized rading is implemened. The sample consiss of 1 days before and afer he even dae. From he above ables and figures, here emerge observaions. Firs, boh he mean sandardized abnormal percenage spread (MSAPS) and mean abnormal percenage spread (MAPS) for boh groups reveal ha he bid/ask spread end o be higher afer he inroducion of he compuerized rading. Second, he significance appears more in he sandardized case han he nonsandardized abnormal spread. 6. Conclusion A significan change in he marke mechanism on he Sock Exchange of Thailand (SET) was examined in order o sudy he impacs of he compuerized rading sysem on he liquidiy disribuion. The volume and he proporional bid/ask spread are used as a proxy for a shif in liquidiy of he marke. We hypohesize ha he compuerized sock rading improves rading efficiency in he marke shown by a rise in volume and a decrease in spread. In our sudy, we find evidence of an increase in volume on even dae bu an increase in spread surrounding he inroducion of he compuerized sock rading program a he SET. The bid-ask spread does no conform o our hypohesis. Less informaion asymmery creaed by he compuerized rading sysem is ouweighed by he informaion loss from he floor sysem as reail invesors could no cach up wih he echnical issue and have slower learning process han he insiuional invesors. When he volume increases resuled from he ne buy of he insiuional invesors, he reail invesors hesiae o rade for immediacy and pursue a wai-and-see sraegy due o a change in rading sysem. Thus, leaving wider bid/ask spread han before he even dae. However, his siuaion is relieved and moves back o he heory as documened by he inroducion of compuerized sysem o all secors. References 1. Beaver, W., 1968, The informaion conen of annual earnings announcemens, Journal of Accouning Research 6, Charoenwong, Charlie, 1994, Essays on Sock Marke Microsrucure: I. An Analysis of Quoed Deph for NYSE and AMEX Socks; II. Insider Trading and he Bid-Ask Spread, Ph.D. Disseraion, Universiy of Memphis. 3. Forjan, James M., and Michael S. McCorry, 1995, Evidence on he behavior of bid-ask spreads surrounding sock spli announcemens, Journal of Applied Business Research 11(4), Glen, Jack D., 1994, Auomaed rading sysems and informaion sysems, Eas Asian Execuive Repors, Glosen, Lawrence R., and Paul R. Milgrom, 1985, Bid, ask, and ransmission prices in a specialis marke wih heerogeneously informed raders, Journal of Financial Economics 14, Hedvall, Kaj, 1996, To rade in- or ouside he limi order book? An empirical sudy of he use of he auomaed rading sysem a he Helsinki Sock Exchange, Journal of Inernaional Financial Markes, Insiuions, and Money 6(/3), Sock Exchange of Thailand, 1991, Auomaed Sysem for he Sock Exchange of Thailand (ASSET), The Sock Exchange of Thailand.