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The Microstructure of Trading Processes on the Singapore Exchange

  • Murphy Jun Jie Lee
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    This thesis contains three papers that examine various issues pertaining to the market structure and trading processes on the Singapore Exchange (SGX). Through the use of proprietary data from SGX, each paper addresses a unique area that is often overlooked in literature but is a well-documented practice among market participants in global financial markets. The conclusions drawn from these papers provide a thorough understanding of the structure and trading processes used on SGX. Hence, empirical evidence presented in this thesis will be of considerable interest to academics and non-academics alike. In particular, the evidence presented here can potentially aid policy developments for the Singapore financial market. The first paper investigates the effects of a reduction in the minimum tick size on SGX. Although both quoted and effective spreads are found to decrease, trading volume and market depth are adversely affected. Despite this, execution quality has not worsened. Front-running behaviour, an area which is keenly discussed in the literature but not tested directly due to data limitations, is also examined. Conducting a direct test on order submissions shows that the tick size reduction has caused front-running to exacerbate. The second paper examines the price impact costs of all trades. Although investors are known to break up large trades into smaller orders, a majority of the empirical literature calculates price impact costs from individual trades. Through implementing a more accurate re-packaging process, this paper shows that misleading results might be inferred when an individual trade is supposedly part of a trade package. In addition, this paper extends the literature by proposing a new measure to evaluate the execution performance of trade packages. The third paper examines the evolution of liquidity in a pure order-driven market. Two distinct sets of literature dominate this area. One set suggests that liquidity provision can be entirely endogenous, thus eschewing the need for designated market makers. The other argues and presents empirical evidence into the importance of designated market makers. However, the former overlooks the known fact that some traders follow a market making strategy. Hence, this paper proposes that pseudo market makers might already exist in a pure order-driven market. Examining order submissions from access to information for all trading accounts, the evidence shows that the largest active trading accounts act as pseudo market makers. This result suggests that liquidity formation is not only intertwined between informed and uninformed investors, but also shows that pseudo market makers play an important role in the evolution of liquidity.

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    This book is provided by Finance Discipline Group, UTS Business School, University of Technology, Sydney in its series PhD Thesis with number 4 and published in 2013.
    Handle: RePEc:uts:finphd:4
    Contact details of provider: Postal: PO Box 123, Broadway, NSW 2007, Australia
    Phone: +61 2 9514 7777
    Fax: +61 2 9514 7711
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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    1. Brad M. Barber & Terrance Odean & Ning Zhu, 2009. "Do Retail Trades Move Markets?," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 151-186, January.
    2. Anand, Amber & Chakravarty, Sugato & Martell, Terrence, 2005. "Empirical evidence on the evolution of liquidity: Choice of market versus limit orders by informed and uninformed traders," Journal of Financial Markets, Elsevier, vol. 8(3), pages 288-308, August.
    3. Hamish D. Anderson & Sapphire Cooper & Andrew K. Prevost, 2006. "Block Trade Price Asymmetry and Changes in Depth: Evidence from the Australian Stock Exchange," The Financial Review, Eastern Finance Association, vol. 41(2), pages 247-271, 05.
    4. Bae, Kee-Hong & Jang, Hasung & Park, Kyung Suh, 2003. "Traders' choice between limit and market orders: evidence from NYSE stocks," Journal of Financial Markets, Elsevier, vol. 6(4), pages 517-538, August.
    5. Ahn, Hee-Joon & Cai, Jun & Chan, Kalok & Hamao, Yasushi, 2007. "Tick size change and liquidity provision on the Tokyo Stock Exchange," Journal of the Japanese and International Economies, Elsevier, vol. 21(2), pages 173-194, June.
    6. Sigridur Benediktsdottir, 2006. "An empirical analysis of specialist trading behavior at the New York Stock Exchange," International Finance Discussion Papers 876, Board of Governors of the Federal Reserve System (U.S.).
    7. Anshuman, V Ravi & Kalay, Avner, 1998. "Market Making with Discrete Prices," Review of Financial Studies, Society for Financial Studies, vol. 11(1), pages 81-109.
    8. Ahn, Hee-Joon & Cao, Charles Q. & Choe, Hyuk, 1996. "Tick Size, Spread, and Volume," Journal of Financial Intermediation, Elsevier, vol. 5(1), pages 2-22, January.
    9. Anand, Amber & Weaver, Daniel G., 2006. "The value of the specialist: Empirical evidence from the CBOE," Journal of Financial Markets, Elsevier, vol. 9(2), pages 100-118, May.
    10. Aitken, Michael & Frino, Alex, 1996. "The accuracy of the tick test: Evidence from the Australian stock exchange," Journal of Banking & Finance, Elsevier, vol. 20(10), pages 1715-1729, December.
    11. Michael Aitken & Carole Comerton-Forde, 2005. "Do reductions in tick sizes influence liquidity?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 45(2), pages 171-184.
    12. Amihud, Yakov & Mendelson, Haim, 1980. "Dealership market : Market-making with inventory," Journal of Financial Economics, Elsevier, vol. 8(1), pages 31-53, March.
    13. Kiril Alampieski & Andrew Lepone, 2009. "Impact of a tick size reduction on liquidity: evidence from the Sydney Futures Exchange," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 49(1), pages 1-20.
    14. Yakov Amihud & Haim Mendelson & Beni Lauterbach, 1997. "Market Microstructure and Securities Values: Evidence from the Tel Aviv Stock Exchange," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-004, New York University, Leonard N. Stern School of Business-.
    15. Anand, Amber & Tanggaard, Carsten & Weaver, Daniel G., 2009. "Paying for Market Quality," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(06), pages 1427-1457, December.
    16. Ball, R. & Finn, F.J., 1989. "The Effect Of Block Transactions On Share Prices: Australian Evidence," Papers 89-04, Rochester, Business - Managerial Economics Research Center.
    17. Barclay, Michael J. & Warner, Jerold B., 1993. "Stealth trading and volatility : Which trades move prices?," Journal of Financial Economics, Elsevier, vol. 34(3), pages 281-305, December.
    18. Bacidore, Jeffrey M., 1997. "The Impact of Decimalization on Market Quality: An Empirical Investigation of the Toronto Stock Exchange," Journal of Financial Intermediation, Elsevier, vol. 6(2), pages 92-120, April.
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