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Noise and the Trading Mechanism: the Case of SETS

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  • Patricia Chelley-Steeley

Abstract

"On 20 October 1997 the London Stock Exchange introduced a new trading system called SETS. This system was to replace the dealer system SEAQ, which had been in operation since 1986. Using the iterative sum of squares test introduced by Inclan and Tiao (1994), we investigate whether there was a change in the unconditional variance of opening and closing returns, at the time SETS was introduced. We show that for the FTSE-100 stocks traded on SETS, on the days following its introduction, there was a widespread increase in the volatility of both opening and closing returns. However, no synchronous volatility changes were found to be associated with the FTSE-100 index or FTSE-250 stocks. We conclude therefore that the introduction of the SETS trading mechanism caused an increase in noise at the time the system was introduced". Copyright Blackwell Publishers Ltd, 2005.

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Bibliographic Info

Article provided by European Financial Management Association in its journal European Financial Management.

Volume (Year): 11 (2005)
Issue (Month): 3 ()
Pages: 387-424

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Handle: RePEc:bla:eufman:v:11:y:2005:i:3:p:387-424

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Cited by:
  1. Patricia Chelley-Steeley & Antonios Siganos, 2005. "Momentum Profits in Alternative Stock Market Structures," Money Macro and Finance (MMF) Research Group Conference 2005, Money Macro and Finance Research Group 63, Money Macro and Finance Research Group.
  2. Andreas Andrikopoulos & Timotheos Angelidis, 2008. "Idiosyncratic risk, returns and liquidity in the London Stock Exchange: a spillover approach," Working Papers, University of Peloponnese, Department of Economics 0017, University of Peloponnese, Department of Economics.
  3. Liao, Huei-Chu & Lee, Yi-Huey & Suen, Yu-Bo, 2008. "Electronic trading system and returns volatility in the oil futures market," Energy Economics, Elsevier, Elsevier, vol. 30(5), pages 2636-2644, September.
  4. Chelley-Steeley, Patricia L., 2008. "Market quality changes in the London Stock Market," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2248-2253, October.
  5. Chelley-Steeley, Patricia, 2009. "Price synchronicity: The closing call auction and the London stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 19(5), pages 777-791, December.
  6. Chung, Huimin & Sheu, Her-Jiun & Hsu, Shufang, 2010. "Trading platform, market volatility and pricing efficiency in the floor-traded and E-mini index futures markets," International Review of Economics & Finance, Elsevier, Elsevier, vol. 19(4), pages 742-754, October.

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