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Sunshine trading in an African stock market

Author

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  • Magueye Dia
  • Sébastien Pouget

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

  • Magueye Dia & Sébastien Pouget, 2011. "Sunshine trading in an African stock market," Managerial Finance, Emerald Group Publishing, vol. 37(3), pages 257-274, February.
  • Handle: RePEc:eme:mfipps:v:37:y:2011:i:3:p:257-274
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    References listed on IDEAS

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    Cited by:

    1. Johannes A. Skjeltorp & Elvira Sojli & Wing Wah Tham, 2011. "Sunshine trading: Flashes of trading intent at the NASDAQ," Working Paper 2011/17, Norges Bank.
    2. 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.
    3. 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.
    4. 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.

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    Keywords

    Africa; Liquidity; Emerging markets; Stock markets;

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