The microstructure of trading processes on the Singapore Exchange
- Publication Type:
- Thesis
- Issue Date:
- 2013
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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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