Abstract
We adopt the Sandås model for order-book equilibrium to examine informed trading on the Taiwanese stock market, a purely order-driven call-auction market. We find that adverse-selection cost is low for well-known stocks with high liquidity and low volatility, but cost is high for monitoring the order books of those stocks. Our empirical results show that the impact of adverse selection is greatest at the beginning of each trading day and that informed traders engage in stealth trading, supporting the stealth trading hypothesis. Finally, with the special tick size rules on the market, both adverse-selection cost and monitoring cost decline as tick size decreases.
Highlights
Securities markets around the world differ in their source of liquidity supply
Our empirical results show that the impact of adverse selection is greatest at the beginning of each trading day and that informed traders engage in stealth trading, supporting the stealth trading hypothesis
We find that the η values of both ±0 range and +1 range groups drop, indicating that the adverse selection cost per average unit price is improved for stocks whose tick size increases by one range, suggesting that liquidity traders are more active in placing orders on stocks with lower unit cost of adverse selection
Summary
Securities markets around the world differ in their source of liquidity supply. In a quote-driven market liquidity is supplied by market makers; in an order-driven market liquidity supply relies on the limit orders submitted by traders; and in a hybrid market designated specialists and limit orders together play the role of supplying liquidity. This paper examines the impact of tick size on trading behavior of informed traders in stocks listed on the TWSE. Because the tick size of TWSE-listed stocks is determined by their transaction price, the effect of tick size change on the trading behavior of informed traders is expected to be different. Instead of the traditional bid–ask spread evaluation method, this study adopts an order-book equilibrium model at the five best bid/ask prices with corresponding quantities to discuss the effect of informed trading. The empirical results using intraday data reveal that the adverse selection cost and monitoring cost are highest at the beginning of the trading day, suggesting that informed traders prefer to submit orders at that time of day.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
