TITLE - FUTURE OF E-TRADING IN
BROKING INDUSTRY
Table of Contents
1.
Introduction
We
assemble the dates of announcement and actual introduction of electronic
trading by the leading exchange of 120 countries to examine the long term and
medium term impact of automation. Estimates from dividend growth model as well
as international CAPM suggest a significant decline in expected returns after
the introduction of electronic trading in the world’s equity markets,
especially in the developing nations. Consistent with this reduction in equity
premium in the long run, there is a positive short-term price reaction to the
switch. These findings are sustained even after controlling for risk factors,
economic growth, financial integration, and economic liberalization. Further
analysis of trading turnover supports the notion that electronic trading
enhances the liquidity and in formativeness of stock markets leading to a
reduction in cost of capital
Rapid
technological advancements in telecommunications and the Internet are
transforming the basic business model of a stock exchange. In an increasingly
competitive world with low barriers to entry, exchange-owners are rapidly
recognizing that efficient market design and trading mechanism are keys to
winning higher market shares for both trading volume and number of listings. Scores of stock exchanges around the world
have abolished their trading floors on which brokers manually matched orders
using an open-outcry system. Fully automated and transparent electronic systems
have replaced those outcry mechanisms.
1.1.
Needs and Scope of the Study
This
paper empirically examines whether this major change in market-microstructure
has helped the listed firms lower their cost of equity because of improvements
in liquidity and the informational environment in the secondary market. Computerization of trading can improve
liquidity in secondary markets through several means. Electronic trading
systems can significantly lower investors’ trading costs (spreads, fees,
brokerage, and commissions) and increase the amount of publicly available
information about a stock’s demand and supply. In addition, electronic systems
are capable of attracting new pools of liquidity by providing affordable remote
access to investors and by retaining unexecuted orders in a consolidated order
book for possible matching with future orders. Liquidity begets liquidity and
creates network externalities. It certainly reduces barriers to market-making
activity, allowing individual investors to compete with brokers having exchange
seats. On automated electronic trading systems, profit-seeking value traders
can closely monitor the market and become suppliers of liquidity even without
their presence on the trading floor. This phenomenon is further facilitated by
the manifestly higher speed of execution and settlement of trades on electronic
systems. Electronic systems are also more transparent than trading floors in
displaying detailed order-flow information such as quotes, depths, and recent
transactions from the limit order book to the market participants in real time.
Higher ex-ante transparency reduces the adverse selection problem.
To read more…….
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