Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence
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Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence
Locals, Foreigners, and Multi-market Trading of Equities: Some Intraday EvidenceWarren BaileyCornell University Johnson Graduate School of ManagementC Locals, Foreigners, and Multi-market Trading of Equities Some Intraday EvidenceConnie X. MaoTemple UniversityThe Fox School of Business and ManagementKulpatra SirodomThammasat University Faculty of Commerce and Accountancy29'h August 2006Address for Correspondence: Warren Bailey, Johnson Graduate School of Management, Cornell University, Sage Hall, Ithaca, NY 14853*6201. wbblf Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidenceficornell.edu: Connie X. Mao. Department of Finance, The Fox School of Business and Management. Temple University. Speakman Hall. Philadelphia. PA 191Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence
22-6083. cmao6iHemp1e.edu: Kulpatra Sirodom, Faculty of Commerce and Accountancy, Thammasat University, Bangkok 10200, Thailand, kulpatra@tu.ac.th. WeLocals, Foreigners, and Multi-market Trading of Equities: Some Intraday EvidenceWarren BaileyCornell University Johnson Graduate School of ManagementC Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidencesociation meetings In Philadelphia for comments on earlier drafts and other assistance, special thanks to Gideon Saar for his very extensive and detailed comments.© 2005, 2006 Warren Bailey, Connie X. Mao, and Kulpatra Sirodom.Locals, Foreigners, and Multi-market Trading of Equities: Some Intraday E Locals, Foreigners, and Multi-market Trading of Equities Some Intraday EvidencevidenceAbstractWe study stock trading in Thailand, where binding foreign ownership limits fragment stock trading into distinct markets for locals andLocals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence
foreigners. Although barriers are significant, we observe substantial trading by foreigners on the local board and by locals on the foreign board. TheLocals, Foreigners, and Multi-market Trading of Equities: Some Intraday EvidenceWarren BaileyCornell University Johnson Graduate School of ManagementC Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidencestock returns and prices across markets, and display profitable holding period returns and enhancements to price discovery that suggest informed trading. Our evidence echoes the features and predictions of classic theories of microstructure, information, and trading.1IntroductionThis paper examines Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidencea unique equity market structure. in Thailand, regulators and individual companies impose limits on (he traction of a company’s equity (hat can be helLocals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence
d by foreigners.1 2 when interest in Thailand’s stock market and in emerging markets generally began to pick up in the middle 1980s, the fraction of sLocals, Foreigners, and Multi-market Trading of Equities: Some Intraday EvidenceWarren BaileyCornell University Johnson Graduate School of ManagementC Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidenceoar d, where foreigner's could trade shares of companies that had reached their foreign ownership limit. Prices on the Alien Board typically exceed pric es lor otherwise identic al shares restricted to local investors by a substantial premium/ Although trading is formally segmented into distinct boa Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidencerds for local investors and foreign investors, investors can cross to the “other* board, but at a cost. Thai investors can hold Alien Board shares, buLocals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence
t must pay the price premium to do so. Foreign investors can buy Main Board shares, but lose cash and stock dividends, warrants, other distributions, Locals, Foreigners, and Multi-market Trading of Equities: Some Intraday EvidenceWarren BaileyCornell University Johnson Graduate School of ManagementC Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidencectronic and order-driven. Broker screens display depth al the three best bid and ask prices, but do not reveal trader identity.This unusual institutional selling helps US study some interesting issues al the intersection of a number of strands of the finance literature. First and foremost, what mark Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidenceet and investor behaviors do we observe in a multiple market setting where some investors cross1Prior IO the 1997 Asian crisis, all companies listed oLocals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence
n the Thai exchange had to be legally “ lhai”, implying a maximum foreign ownership of 49%. The government imposed a tighter limit, 25%, in ceirain inLocals, Foreigners, and Multi-market Trading of Equities: Some Intraday EvidenceWarren BaileyCornell University Johnson Graduate School of ManagementC Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidencee atbilraged away. Once the foreign ownership limit has been reached, shares bought on the Main Board cannot be sold on die Alien Board. Shares bought on the Alien Board cun be sold on die Main Board, but the typically substantial price premium would be lost. If a particular slock never reaches the Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidenceforeign ownership limit or its foreign ownership drops helow the limit, all trading occurs on the Main Board. Another aspect worth mentioning is that,Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence
when a local buys an Alien Boaid share, stock exchange records retain its status as eligible for trading on the Alien Board.1between markets? As we dLocals, Foreigners, and Multi-market Trading of Equities: Some Intraday EvidenceWarren BaileyCornell University Johnson Graduate School of ManagementC Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence the effects of liquidity and information on patterns of market activity in Thailand’s multiple-market setting. Furthermore, our data includes some information about the identity of the trader standing behind each order. Specifically, we know whether each order is associated with a foreigner (almost Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence certainly an institution), a Thai institution, a member of the stock exchange, or a Thai individual. Locals may benefit from access to more or betterLocals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence
information about local companies, while institutional investors may benefit from more resources and experience.We conduct a series of empirical testLocals, Foreigners, and Multi-market Trading of Equities: Some Intraday EvidenceWarren BaileyCornell University Johnson Graduate School of ManagementC Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidencee “other” market, foreigners account for fifteen percent of the trading volume on the Main Board, and Thai individuals account for forty-four percent of the trading volume on the Alien Board.3 There is much evidence that liquidity is a driver of cross-market trading. Cross-market orders tend to be s Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidenceubmitted at times of high liquidity (that is, low bid-ask spread and high depth) in the market to which investors cross, and, as a consequence, cross-Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence
market orders tend to be filled at relatively better prices.4 Some evidence also suggests a relationship between information and cross-market trading.Locals, Foreigners, and Multi-market Trading of Equities: Some Intraday EvidenceWarren BaileyCornell University Johnson Graduate School of ManagementC Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidenceding period returns based on cross-market trades appear particularly profitable, suggesting that some cross-market activity represents informed trading. Cross-market trading also appears to3Wemer and Kleidon (1996) study British stocks cross-listed in London and New York, and suggest that some inves Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidencetors voluntarily segment themselves in one market, as does the “location of trade” literature (Froot and Dabera, 1999; Chan, Hameed. and Lau, 2003).4DLocals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence
rudi and Massa (2005) study primary and secondary markets for Italian government bonds, and find that some dealers trade aggressively across markets iLocals, Foreigners, and Multi-market Trading of Equities: Some Intraday EvidenceWarren BaileyCornell University Johnson Graduate School of ManagementC Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidenceure displays a variety of investor behaviors that echo the assumptions and implications of theoretical works on market microstructure and on information and capital markets that we describe below.The balance of this paper is organized as follows. Section 2 motivates our tests. Section 3 discusses th Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidencee data, relevant institutional details of the Stock Exchange of Thailand, and some of the basic calculations and transformations of the data needed foLocals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence
r our tests. Section 4 presents results while Section 5 is a summary and conclusion.2Motivation and overview of testsTo think about the phenomenon of Locals, Foreigners, and Multi-market Trading of Equities: Some Intraday EvidenceWarren BaileyCornell University Johnson Graduate School of ManagementC Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence of Chowdhry and Nanda (1991), small uniformed investors cannot move across markets while informed traders and large discretionary liquidity traders optimize where and how they trade. In the Thai market, the frictions that impede crossing between the Main and Alien boards depend on whether the trade Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidencer is a local or foreigner, and are also likely to vary across individual and institutional investors. In Madhavan (1995), informed investors and largeLocals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence
liquidity traders also benefit by spreading their trading across more than one market. A fragmented trading environment may persist, rather than consLocals, Foreigners, and Multi-market Trading of Equities: Some Intraday EvidenceWarren BaileyCornell University Johnson Graduate School of ManagementC Locals, Foreigners, and Multi-market Trading of Equities Some Intraday EvidenceAs a consequence, discretionary liquidity traders may trade both individual stocks and stock index futures to avoid the informed traders. In Admati and Pfleiderer (1988), discretionary liquidity traders may choose to “swim with the sharks”, that is, suffer some disadvantageous5 Related empirical pap Locals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidenceers include studies of price discovery for stocks listed on more than one U.S. exchange (Hasbrouck. 1995) or across equity and equity derivative markeLocals, Foreigners, and Multi-market Trading of Equities Some Intraday Evidence
ts (Chan. Chan, and Karolyl, 1991: Stephan and Whaley, 1990; Easley, O’Hara, and Srinivas, 1998; Chan, Chung, and Fong, 2002.).3https://khothuvien.corGọi ngay
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