Market transparency and intraday trade behaviour in the London Stock Exchange

Lai, Man-Kit (1997) Market transparency and intraday trade behaviour in the London Stock Exchange. Doctoral thesis, University of London: London Business School.

Abstract

In this thesis, we examine three issues in the London Stock Exchange (LSE). Firstly, we study the relationship of stock returns and trade sizes. Secondly, we examine the price impacts of trades under different transparency regimes. Thirdly, we analyse the proportion of large trades dealt within the touch. The central theme is to explain these issues in the light of a particular market practice, trade protection, which involves a trade with a guaranteed price and an option held by a client. It delays the trade reporting time and distorts the time sequenceo f price characteristicsr eported to the LSE. We find that trade protection has explanatory power in interpreting the ambiguous results of some prior studies. Contrary to the prediction of existing market microstructure theories, we find that the return-size curve is downward sloping for buys. We show that trade protection leads to a systematic downward bias on the measured price impacts. After adjusting for the bias, the price impacts of large trades are no longer smaller than those of small trades. We also find that there is no systematic effect of transparency on the price impacts across different transparency regimes. Our findings indicate that trade protection makes us difficult to interpret the measured price impacts from reported data. The reported high proportion of large trades dealt within the touch is the major evidence used by the Office of Fair Trading for greater transparency. We find that the proportion is overstated due to trade protection. The extent of using trade protection to delay publication is a function of the transparency rules themselves. In a dynamic stock market setting, we are sceptical about the enforceability of the rules. Most importantly, transparency rules are determined by the competitiveness of the international stock markets.