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A Worldwide Examination of Exchange Market Quality: Greater Integrity Increases Market Efficiency

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  • Michael Aitken

    ()

  • Frederick Harris

    ()

  • Shan Ji

    ()

Abstract

We develop a framework for assessing security market quality (MQ), relating five elements of market design to three metrics of market integrity and two metrics of market efficiency. We empirically implement this integrity–efficiency MQ framework by testing a hypothesis that trade-based ramping manipulation at the close (MTC) raises execution costs on 24 security markets worldwide. Estimating a simultaneous equations model of ramping incidence, spreads, and the probability of deploying real-time surveillance (RTS), we show that quoted bid-ask spreads are positively related to the incidence of MTC across seven liquidity deciles. The magnitude is economically significant; improving market integrity by cutting MTC in half reduces spreads 6–11 %. Allowing direct market access in conjunction with RTS, conducting auctions at the close, and developing regulations that require surveillance, all reduce MTC and thereby lower spreads, assuring better market integrity and enhancing market efficiency. Introducing circuit breakers or prohibiting shorts poses integrity–efficiency tradeoffs. Copyright Springer Science+Business Media Dordrecht 2015

Suggested Citation

  • Michael Aitken & Frederick Harris & Shan Ji, 2015. "A Worldwide Examination of Exchange Market Quality: Greater Integrity Increases Market Efficiency," Journal of Business Ethics, Springer, vol. 132(1), pages 147-170, November.
  • Handle: RePEc:kap:jbuset:v:132:y:2015:i:1:p:147-170
    DOI: 10.1007/s10551-014-2294-5
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    References listed on IDEAS

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    Cited by:

    1. James J. Angel & Douglas M. McCabe, 2018. "Insider Trading 2.0? The Ethics of Information Sales," Journal of Business Ethics, Springer, vol. 147(4), pages 747-760, February.
    2. Fuan Li & Sixue Zhang & Xuelian Yang, 2018. "Moral Integrity and Relationship Commitment: An Empirical Examination in a Cross-Cultural Setting," Journal of Business Ethics, Springer, vol. 151(3), pages 785-798, September.

    More about this item

    Keywords

    Market integrity; Business ethics; Security market quality; Market manipulation; G28; G2;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G2 - Financial Economics - - Financial Institutions and Services

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