Trading frequency and the efficiency of price discovery in a non-dealer market

Shmuel Hauser, Azriel Levy, Uzi Yaari

Research output: Contribution to journalArticlepeer-review

Abstract

The increasing popularity of non-dealer security markets that offer automated, computer-based, continuous trading reflects a presumption that institutionally-set trading sessions are economically obsolete. This theoretical paper investigates the effect of the trading frequency, a key feature of the trading mechanism, on the efficiency of price discovery in a non-dealer market. By tracing the market pricing error to the correlation structures of arriving information and pricing errors of individual traders, the effect of diverging expectations on error-based and overall return volatility is isolated. The analysis reveals that, due to a portfolio effect, an increase in the trading time interval has contradictory effects on the portion of return volatility stemming from pricing errors. The greater accumulation of information increases error-based return volatility, but the greater volume and number of traders per session have the opposite effect. The net effect on overall return volatility can go either way. It is found that the return volatility of heavily traded securities is likely to be minimized under continuous trading, but that of thinly traded securities may be minimized under discrete trading at moderate time intervals. The latter is more likely to occur the greater is the divergence of expectations among traders. These findings challenge the presumption that automated continuous trading in a non-dealer market is more efficient than discrete trading for all securities, regardless of trading volume. The findings are applicable to all economies, but have special importance for developing countries where typically a single market is dominated by small issues and a low volume of trade. As a by-product of the analysis, it is shown how to correct the biased estimate of inter-session price volatility when observations are less frequent than the trading sessions themselves.

Original languageEnglish
Pages (from-to)187-197
Number of pages11
JournalInternational Journal of Phytoremediation
Volume21
Issue number1
DOIs
StatePublished - 1 Jan 2001
Externally publishedYes

Keywords

  • Non-dealer security markets
  • Portfolio effect
  • Price discovery
  • Return volatility
  • Trading frequency

Fingerprint

Dive into the research topics of 'Trading frequency and the efficiency of price discovery in a non-dealer market'. Together they form a unique fingerprint.

Cite this