Information flows and open outcry: evidence of imitation trading

Abstract

We provide empirical evidence on how market making is affected by the existence of a crowd in a floor trading system based on data from the Toronto Stock Exchange which closed its trading floor in April 1997. While effective bid–ask spreads, trading volume and average trade size are unchanged with the introduction of system-only trading; for floor-traded securities, there is strong evidence that given type of event (trade or quote change) occurs with greater probability following an event of the same type than it does unconditionally. We examine the three hypotheses put forward by Biais et al. (1995) and find sufficient evidence to reject the hypotheses of strategic order splitting and, similar but successive reaction to the same events. We are unable to reject the hypothesis of traders engaging in imitating behavior which is likely to arise when traders can better identify each other in the trading environment.