Continuous Trading or Call Auctions: Revealed Preferences of Investors at the Tel Aviv Stock Exchange

Abstract

We use the move of Israeli stocks from call auction trading to continuous trading to show that investors have a preference for stocks that trade continuously. When large stocks move from call auction to continuous trading, the small stocks that still trade by call auction experience a significant loss in volume relative to the overall market volume. As small stocks move to continuous trading, they experience an increase in volume and positive abnormal returns because of the associated increase in liquidity. Overall, though, a move to continuous trading increases the volume of large stocks relative to small stocks. CHOOSING AMONG ALTERNATIVE TRADING mechanisms is an issue of growing concern to financial economists. 1 Continuous trading increases the frequency of trading, thereby enabling immediate execution during the entire business day. Call auctions, on the other hand, lead to temporal aggregation of trades at predetermined points in time. 2 Brennan and Cao~1996! show that a move

Liquidity Risk, Speculative Trade, and the Optimal Latency of Financial Markets

“…In contrast, smaller stocks that still traded by call auctions experienced a significant loss in volume relative to the overall market volume. Kalay et al (2002) conclude that investors prefer continuous to periodic trading, i.e., there is a demand for immediacy. In contrast, Hendershott and Moulton (2011) study a more recent change in the introduction of the NYSE Hybrid Market, which increased automation and significantly reduced the execution time for market orders (from 10 seconds to less than one second).…”

“…Silber, 1978, andEasley et al, 2013) 3 and the optimal structure of markets (e.g. Garbade and Silber, 1979, Amihud et al, 1997, Kalay et al, 2002. Garbade and Silber (1978) trading of large cap stocks on TASE was moved from once-a-day call auctions to an opening call auction followed by iterated continuous trading.…”

Latency arbitrage in fragmented markets: A strategic agent-based analysis

“…Empirical work on the effects of switching to periodic clearing is limited and again relies largely on the analysis of historical events (Webb et al, 2007;Kalay et al, 2002). For example, Amihud et al (1997) find that switching from a daily call auction to a combination of discrete and continuous trading in the Tel Aviv Stock Exchange is associated with improvements in liquidity.…”

Overcoming the Challenge of Cooperating with Competitors: Critical Success Factors of Interorganizational Systems Implementation

“…The migration to TACT enabled TASE to successfully change its trading processes and to overcome threats in its business environment. Kalay, Wei, & Wohl, (2002) provide a detailed description of the TASE trading processes before and after the implementation of TACT. The fully computerized real-time continuous trading system currently deals with all forms of securities trading, such as stocks, convertible securities, corporate and government bonds, index options and futures, currency options and futures and a variety of securities derivatives.…”

“…Shortly afterwards, the nearly 900 less traded stocks were also transferred. Kalay et al (2002) provide a detailed account of the transfer process, and their research indicates that during the conversion phase, those stocks that were moved to TACT had greater trading volumes.…”