Site icon Capital Markets Cooperative Research Centre | Assuring Market Quality

CMCRC RESEARCH ARTICLE ON MARKET FAIRNESS: THE POOR COUNTRY COUSIN OF MARKET EFFICIENCY PUBLISHED IN FT45 JOURNAL

A ground-breaking article from the CMCRC suggests that there might exist a trade-off between efficiency and integrity in financial markets, leading to a challenging balancing act for regulators. In an article recently published in the Journal of Business Ethics, Professor Michael Aitken and a number of other senior researchers from the CMCRC explain that markets need to be efficient and free of threats to their integrity in order to function properly. They measure both efficiency and integrity on the LSE and Euronext Paris and suggest that there exists a trade-off between the two that may have gone out of kilter in the wake of the introduction of MiFID1.
Abstract: Notwithstanding that regulatory mandates require that all security market design changes pass the dual test of fairness and efficiency, most regulators have not even defined efficiency let alone fairness. It should therefore come as little surprise why design changes such as the introduction of algorithmic and high frequency trading or dark pools are causing considerable controversy in the marketplace. There is no evidence-based policy framework within which such changes can be meaningfully evaluated. In this work we seek to develop a Market Quality Framework in which as a start both fairness and efficiency are defined. From these definitions we establish a series of empirical proxies. Thereafter, we develop a systems estimation model and demonstrate its use by analyzing the 2004-2011 explosive growth in algorithmic trading (AT) on the London Stock Exchange and NYSE Euronext Paris. Our results show that greater AT increases transaction cost efficiency and reduces information leakage in top quintile stocks. In 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.
News Link: Download article
Exit mobile version