University: University of New South Wales
Supervisor: Michael Aitken

Research Questions: 

• How to examine the market quality of a securities market?
• What is the impact of market design changes on market quality?

Research Motivation:

Regulators have a role to maintain the fairness (integrity) and the efficiency of markets. For example, the Australian Securities and Investments Commission is required to work towards ‘a fair and efficient market characterised by integrity and transparency’. Despite these mandates, regulators do not explain how they determine whether market design changes (in technology, regulation, information mechanism, participants or financial instruments) enhance both integrity and efficiency. Whilst previous academic work addresses the impact of market design changes on market efficiency, there is a lack of literature seeking to quantify the effect of market design on integrity.

High-level Research Design:

Motivated by the lack of quantitative measures for both market integrity and efficiency, the first aim of this dissertation is to develop a framework for evaluating the two dimensions of market quality. Market efficiency deals primarily with transactions costs and price discovery, measures for which are established in academic literature. Market integrity deals with the extent to which market participants engage in prohibited/undesirable trading behaviours, chief among which are informed trading, market manipulation and front-running. In the first paper, we measure the information leakage prior to price sensitive announcements to assess the amount of informed trading taking place on an exchange. We use the information leakage proxy to analyse market integrity on the ASX relative to peer exchanges in the Asia Pacific region and identify factors that explain cross-sectional variation in market integrity.

Market quality metrics can also be used to study a market design change within a single market. The removal of the real time display of broker IDs from orders on the ASX in November 2005 represents a change in the level of information available to market participants. Using the proxy for information leakage, the second paper conducts an event study to investigate changes to market integrity at different levels of trader anonymity. To ensure the robustness of our results, we repeat the analysis using the Probaility of Informed Trading (PIN) measure of Easley, Kiefer, O’Hara and Paperman (1996).

Improved market integrity is likely to be associated with higher market efficiency. A fairer market will attract more capital flows, which in turn improves market quality through higher liquidity and lower trading costs. In the final paper, we draw on established measures of market efficiency to assess relationships between integrity and efficiency.