Market Fairness: The Poor Country Cousin of Market Efficiency

Abstract

Both fairness and efficiency are important considerations in market design and regulation, yet many regulators have neither defined nor measured these concepts. We develop an evidencebased policy framework in which these are both defined and measured using a series of empirical proxies. We then build a systems estimation model to examine the 2003-2011 explosive growth in algorithmic trading (AT) on the London Stock Exchange and NYSE Euronext Paris. Our results show that greater AT is associated with increased transactional efficiency and reduced information leakage in top quintile stocks. For less liquid stocks, manipulation at the close declines. We also document the tradeoff between reduced spreads and increased manipulation or information leakage following the introduction of MiFID1.

The Effects of Algorithmic Trading on Security Market Quality

“…On the other hand, the univariate impact of MiFID1 on LEAKAGE is in the opposite direction. Controlling for many confounding variables, we find in our multivariate analysis (reported in Aitken et al [2015] and summarized in Exhibit 4) that on net, MiFID1 increased EOD Manipulation and LEAKAGE in London and Paris, respectively.…”

“…Distinctively, we provide the first estimates on the relationship between AT and two metrics of market integrity (Aitken et al [2015]). We show that although AT increases substantially toward the end of the day, the closing price is less manipulated the higher the incidence of AT in both London and Paris.…”

“…Using 3SLS we estimate the following three-equation system to account for the cross-equation correlation of the , (Aitken et al [2015]):…”

Stock market manipulation: A comparative analysis of East Asian emerging and developed financial markets

“…But the important question is whether or not this improved market efficiency has increased market integrity. This is important because one of the main issues in financial markets is the protection of integrity and fairness of the market in order to maintain market efficiency (Aitken et al, 2015(Aitken et al, , 2018Aitken & Harris, 2011). By market integrity, we mean that markets are unimpaired, uncorrupted and sound, whereas fairness means that markets are impartial and equitable (Austin, 2016).…”

Tiered Information Disclosure: An Empirical Analysis of the Advance Peek into the Michigan Index of Consumer Sentiment

“…This study contributes to the existing literature in three important ways. First, the impact of HFT on market quality has attracted substantial interest in the past several years (Brogaard, ; Hendershott, Jones and Menkveld, ; Angel, ; Brogaard, Hendershott and Riordan, ; Goldstein, Kumar and Graves, ; Jarnecic and Snape, ; Laughlin, Aguirre and Grundfest, ; Scholtus, van Dijk and Frijns, ; Aitken, Cumming and Zhan, ; O'Hara, ; Manahov, ; Aitken, Aspris, Foley and Harris, ; Hirschey, ). Parallel with this, a vibrant literature exists on trading activity around macroeconomic announcements (Ederington and Lee, ; Fleming and Remolona ; Balduzzi, Elton and Green, ; Flannery and Protopapadakis, ; Andersen, Bollerslev, Diebold and Vega, ; Erenburg, Kurov and Lasser, ; Tetlock, ).…”