March 01, 2003
Article in Handbook of World Stock, Derivative & Commodities Exchanges
By Michael Aitken and Audris Siow
Chair of Capital Markets Technologies and PhD Student, University of New South Wales, respectively.

Introduction

The objective of this article is to discuss and ultimately construct a league table that helps international investors rate security markets on the basis of their demonstrated commitment to the twin goals of market efficiency and market integrity. More specifically we rate a broad cross-section of twenty-one world equity markets ? representing lead exchanges in the North American (4), European (8) and Asis-Pacific regions (9) ? on these characteristics. Besides an overall ranking, we test whether there is any obvious relationship between market efficiency and market integrity. In particular we pose the question ? Are more efficient markets likely to display higher market integrity or vice versa?

Notwithstanding significant issues associated with such a comparison, we find it curious that there are no public ?league rankings? on the two characteristics and in particular no attempt to relate one to the other. The closest to a market rating we can observe are implicit rankings by the World Federation of Exchanges on aspects such as the numbers of securities listed, market capitalisation and turnover. Aside from these rankings we also note a fair number of academic papers comparing transaction costs and volatility, but mostly for very few, usually two, markets. The absence of a substantial cross-market ranking is the primary motivation for the current article.

Such a ranking might be useful for at least three reasons. First, it might provide tangible benefits, in terms of encouraging investor interest, in those markets making a ?real? effort in these areas. Faced with uncertainty, even institutional investors have little option but to increase their required rates of return, in turn increasing the cost of funds in markets/investments where efficiency and integrity are perceived problems. Second, such a league ranking might provide greater motivation for markets that have comparative problems with efficiency and financial integrity to be more proactive in these areas. Indeed it might help determine appropriate partners in international alliances. Finally, such a ranking may serve to motivate debate in order, ultimately, to achieve an acceptable basis for such a comparison.

In the next section we begin by examining the relationship between market efficiency and integrity. After that we discuss appropriate methods to proxy/measure these two elements. The next section describes the data set and its limitations before setting out the key findings. The final section concludes by highlighting possible research extensions.