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Alternative Trading Systems and Liquidity

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Published: 6th Dec 2019

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Tagged: Finance

Since the development of the using electronics trade  most  continuous  auction  markets, price-contingent limit  orders  are  arranged  on  the  basis  of  priority  rules  in  the  limit  rank book  and  help  provide  liquidity. There are two reasons from which the briefings are risky.  First liquidity  providers  threat  trading  with  better  informed  traders,  that  is being  picked  off. To  lower  this  threat,  liquidity  providers  would  like  the  selling system  to  allow  them  to  trade selectively  with  counterparties  of their  option Second,  they  risk  being  front-run  by  other  traders  and,  thereby  increase  the market  impact  of their  orders. In this way to smaller the risk  large traders desire to conceal their  orders  and  expose  them  only  to  traders  who  are  most likely to  trade. The  outcome  thus  far  recommend  that  the  execution  costs  are  smaller for  all trade-size  categories.  The divergence  in  average  trading  cost  remains  statistically important  after  calculating  for differences  in  adverse  selection,  relative  tick  sizes,  and economic attributes  across  samples. Researchers dispute that by using electronics procedure selling has tremendously increased. Due to selling method a trade-off between higher charges of operating a selling floor and likely better execution due to the beneficial job of the specialist and floor brokers. The liquidity job of the authority and floor brokers is more readily apparent for less energetic stores, the job of these branches is less clear for stores with large trading volume. The off-exchange traders may have a favorite to road briefings in liquefied stores electronically rather than earn the higher assignments of the floor broker and if the worth of human intermediation is worse for highly liquefied stores, then we may look frontwards to an automated trading mechanism to have worse execution charges for a test of liquefied store So by comparing execution charges of large and liquefied stores through the two market structures. Up to some extent it is intentionally biasing my outcomes in the direction of finding smaller execution charges in an automated trading system. The bigger dealing capacity in the dwelling homeland presents important liquidity benefits that may be unrelated to the relation efficiencies of the dealing mechanism. By analyzing execution assesses of supplies with alike characteristics in the two markets this paper attempts to overwhelm such a limitation and enquire the relation effectiveness of the market organizations in their usual dealing environment. While in an developed association dealing means offers many benefits over the floor but as by contemplating the present tendency toward automation of auction markets, the relation effectiveness of an automated versus a floor-based means is an important topic to be addressed.

1.2 Problem Statement

The matter engaged in the conceive of dealing schemes are complex (Harris (1996, 1997)). In most relentless auction markets, price-contingent restrict instructions are organized on the cornerstone of main concern directions in the restrict alignment publication and assist supply liquidity. A trade that happens when a hard-hitting dealer submits a market alignment and claims liquidity. To appeal demanders of liquidity, designers of dealing schemes desire liquidity providers to completely brandish their orders. However, brandishing restrict instructions can be dodgy for two reasons. First, liquidity providers risk dealing with better acquainted traders that is, being selected off. To smaller this risk, liquidity providers would like the dealing scheme to permit them to trade selectively with counterparties of their choice. Second, they risk being front-run by other traders and, thereby boost the market influence of their orders. To smaller this risk, large traders desire to conceal their instructions and reveal them only to traders who are most probable to trade with them. Harris (1997) says the art of trading lies in knowing when and how to expose trading interests. Traders who not ever reveal not ever trade. Traders who over-expose develop high transactions cost. If traders are compelled to brandish their instructions completely, the dealing scheme may not get the liquidity. Hence, designers of dealing schemes (including floor-based and automated systems) formulate dealing directions to assist liquidity provider’s better command the risk of alignment exposure. Rules of dealing are very significant because they constrain the proficiency of liquidity providers to command the risk of alignment exposure. A key significance is that liquidity providers may accept less compensation for their services in dealing schemes that supply better amenities to command risk.

1.3 Hypothesis

Floor trading is considered to be the best way of transaction of the returns but it is time consuming and traders are unaware of the liquidity. From an industrial organization perspective, the electronic trading mechanism offers many advantages over the floor (Domowitz & Steil (1999)). First, the advantage of any trading system increases with the number of locations from which the system can be accessed. Second, the heavy trading volume and the growing number of new listings raise concern about the capacity limits of a trading floor. Third, the development and maintenance cost of an automated market is considerably lower than that of a trading floor, thus providing significant cost reductions.

H1: There is a significant difference between floor trading and electronic system on liquidity.

The  possibility  that  human  intermediation  may  improve  liquidity  has  important  implications  for  stock  exchanges  and  electronic  communication  networks  that  are  considering  moving  to  the  present  form  of  electrical devices trading  system.  If  large  traders  are  not  able  to  trade  strategically  in  an  automated  market,  then  they  may  either  demand  larger  compensation  for their risk  or prefer  to trade  in  alternative  avenues.


The trade  execution  costs  of similar  stocks  in  an automated  trading  structure and  a  floor-based  trading  structure. The cost of executing  trades  across  related  firms  is  considerably  lower  in New  York compared to  Paris’. The reliant variable for this study was liquidity, Stock cost volatility and independent variable was dealing volume. The   outcome  recommend  that  the  present  form  of  the  automated  trading system  may  not  be  capable  to  fully  replicate  the  benefits  of human  intermediation  on a trading  floor (Venkatarman, 2001).

The significance of “ATS” (Alternative Trading Systems) and their influence on the liquidity at customary market places. The Result recounts about two things. First ATS are actually more thriving in the United States than in Europe. Second, within the United States, there is an influence of ATS on the NASDAQ trader market and on the NYSE. ATS are appealing about 30 percent of market share in the NASDAQ market, while their influence on the NYSE is rather small (Degryse & Achter, 2001).

The new market setting to enquire the evolution of liquidity in electrical devices restricts alignment market. it examines the dissimilarities in the use of market and restrict instructions by acquainted traders and liquidity traders, and we further investigate the dissimilarities between little and large liquidity traders and present outcomes on how the proposal rates of restrict instructions (relative to market orders) develop through time, and on how the instability of a security or the worth of data held by informed traders sway dealer strategies (Bloomfield & Maureen, 2003).

In  order  to minimize individual dealing frictions like transaction charges or market application restrictions Screen trading directs to a more powerful market integration as in evaluation to floor trading. The reliant variable for this study was liquidity and unaligned variable was stock price. Two main results were got in the paper.  Firstly, futures and spot charges precede simultaneously more closely when both devices are computer display traded. This finding carries the major hypothesis of the paper. Secondly, the discerned discrepancy in market integration will not be attributed to distinct arbitrage trading (Kemp & Korn, 2000).

The outcome analyze from this study is found that disperse dimensions is more probable to be influenced by number of transactions, rather than of trade size. Overall, founded on these empirical outcomes, the information content of number of transactions appears to be higher than that of trade dimensions in the Taiwan OTC market (Tai, Chiang & Chou, 2006).

The relationship between dealing cost, technology, and the environment of intermediation in the dealing services industry. Electronic markets embodying automated trade execution are connected to reductions in dealing transaction costs. Lower explicit charges are associated to development and functioning charges in an electrical devices environment. Information available from electrical devices restricts alignment publications are recognized as entails of realizing implicit cost savings. The idea of liquidity administration in electronic environments is presented, and its promise and use in perform are illustrated using restrict alignment publication data. The empirical outcomes propose new functions for brokerage and exchange procedures, and affray between the two. Reintermediation is characterized as the reestablishment of a disintermediated institution, and its environment is enquired for brokers and dealing markets in an electronic environment. Competitive benefit with esteem to the provision of liquidity administration services is in evaluation over kinds of reintermediaries (Domowitz, Jean & Frank 2001).

This disturbance between two dealing venues, Electronic Communication Networks (ECNs) and Nasdaq market makers. ECNs. The advantages of anonymity and pace of execution, which appeal acquainted traders. Thus, deals are more probable to happen on ECNs when data asymmetry is larger and when dealing capacity and stock-return volatility are high. ECN deals have larger enduring cost influences and more personal information is disclosed through ECN deals than though market-maker trades. However, ECN trades have higher ex ante dealing charges because market manufacturers can preference or internalize the less acquainted deals them better executions. The affray for alignment Low over trading venues that over divergent services to their clients and presents the systematic study of dealing on the most alternate dealing systems, ECNs.To analyze why some traders use ECNs, we study how the differences in services between ECNs and Nasdaq market manufacturers affect the alternative of trading venue and the cost of ECN and market-maker trades. We furthermore investigate whether acquainted deals are more probable to happen with market manufacturers or on ECNs, and study the significance of ECN deals for the aggregate cost discovery process. We display that ECNs appeal more acquainted instructions and that these deals occur during time span of high capacity and stock-return volatility (Barclay, Hendershott & Mc Cormick, 2003).

Preferential by the Security Exchange Commission, Electronics Communication Networks (ECNs) have developed as alternate dealing schemes that enable to bypass the markets manufacturers on the supply markets and permit investors to exactly reimburse and execute their instructions with more discretion and at a smaller cost. In this paper we underscore the fragile feature of the present ECNs and inquiry their comparable benefits through empirical evidences. A rationale for market manufacturers and ECNs’ unwarranted disperses and overreactions. The use of mesh idea best features notions of critical mass, open interface and alliances. Moreover, since affray between market manufacturers and ECNs is founded on capacity, the emergence of ECNs has been mostly likely because of the development of the American stock market. Furthermore, schemes of new ECNs are constructed on anticipated future growth. Should the market shrink, ECNs would quickly be forced to amalgamate and most of them would disappear (Benhamou & Serval, 1999).

The NASDAQ multiple trader market is conceived to make slender bid-ask spreads through the affray for alignment flow amidst one-by-one dealers. However, we find that odd-eighth extracts are effectively nonexistent for 70 of 100 actively traded NASDAQ securities, encompassing Apple Computer and Lotus Development. The lack of odd-eighth extracts will not be clarified by the discussion hypothesis of Harris (1991), dealing undertaking, or other variables considered influencing spreads. This result suggests that the interior disperse for a large number of NASDAQ supplies is at least $0.25 and raises the inquiry of if NASDAQ dealers implicitly collude to maintain broad spreads (Christie, Harris & Schultz, 1994).

This breakthrough of an asset’s full-information worth by electronic communication systems (ECNs) and Nasdaq market makers. The outcomes display that despite likely market fragmentation due to the supplement of alternate dealing venues, quotes submitted by ECNs and dealers have data content and extracts on the same asset contemplate widespread information. The clues furthermore disclose that ECNs are important contributors to the cost breakthrough method, being the superior venue in eight of the ten most hardworking stocks. Further investigation proposes that functional dissimilarities between ECNs and Nasdaq market manufacturers have an influence on cost discovery. Specifically, ECNs’ share of cost breakthrough is increased by acquainted traders who are tempted by the proficiency to trade anonymously but is impeded by liquidity traders who are captivated by the likelihood of lower dealing costs (Huang & Stall, 1995).

In the last ten years, the expanded affray between European supply swaps has decreased the cost of dealing and expanded the kind of dealing mechanisms. The London Stock Exchange, which initiated the affray in 1986 by setting up the SEAQ-I market, captivated substantial trading volume in Continental equities in the late 1980s. Later, although, Continental swaps recovered most of the dealing capacity from London upon restructuring their auction schemes so as to offer very low dealing charges, larger transparency and relentless dealing by an automated alignment book. At the same time, the disperses cited by SEAQ-I dealers expanded considerably. Lately, potential competition by relentless auction schemes is intimidating even the market for British equities, and prompting the London Stock Exchange to restore its previous scheme with an automated order book. As in Continental Bourses, this automated auction scheme is anticipated to run in aligned with a dealership market for large trades. So dealing schemes emerge to be converging in the direction of a dualistic structure all over Europe. The paper articles this expansion, and considers how the competition between European swaps is probable to develop and which possibilities and hazards the future may contain for them (Pagano, 1997).

All market participants favor the flexibility of dealing on the floor to dealing through the electronic system restrict alignment publication, traders of infrequently swapped supplies manage not have outlook the exchange floor as a feasible alternate granted the need of a dealing crowd. Therefore, regardless of widespread preferences for flexibility over traders, traders of infrequently swapped supplies manage not relish the identical flexibility imparted to traders of often stocks. Finally, the outcomes illustrate that market participants changed the timing of their activities to take benefit of expanded dealing possibilities surrounding the implementation of the market broad circuit breaker. Specifically, the outcomes display an acceleration of undertaking close to the market broad circuit breaker that is reliable with the magnet effect and a curtailment of undertaking (order placement) throughout the market broad circuit breaker we find that market participants adjust their dealing schemes throughout farthest market movements in such a way that they favor human dealing means over electrical devices ones and will adjust the timing and alternative of alignment kind in such a way to maximize their dealing flexibility. More significantly, we find that flexibility is valued by market participants throughout unsure times, therefore their fondness for dealing venues that permit discretion (human founded dealing systems), for alignment kinds that bypass inflexibility (Goldstein & Kavajecz, 2003).

Electronic dealing schemes manage offer smaller functioning charges and the likelihood of isolated get access to the market. On the other hand there are contentions founded on the anonymity of electrical devices dealing schemes which propose that harmful assortment is a more severe problem in electrical devices dealing schemes and, thus, the bid-ask disperses may be higher. This location the topic of transaction charges in floor and computerized dealing schemes empirically. In Germany, floor and computer display dealing for the identical supplies live in parallel. Both markets are liquid and function simultaneously for some hours each day. An investigation of the market portions of the vying schemes discloses that the electrical devices dealing system is somewhat less appealing for less fluid supplies and in the occurrence of higher come back volatility. The bid-ask disperses disclose a alike pattern. The floor seems to be more comparable the less fluid a stock. The outcome of an evaluation of the grade of the disperses partially counts on if the courtage – a charge which has to be paid on the floor – is supplemented to the floor spread. We further document that disperses in the electrical devices dealing scheme reply more very powerfully to rises in return volatility and that the harmful assortment constituent of the disperse is bigger in the electrical devices system. The stage of cost clustering is higher on the floor. We contend, although, that the stage of clustering is a poor assess of market value, mostly due to a very little smallest tick size. We discuss significances our outcomes have for the conceive and use of electrical devices dealing systems (Theissen, 1999).

Electronic dealing schemes undeniably offer numerous benefits and may assist to decrease trading costs. They are, although, in a certain sense inherently anonymous because it is tough to reveal the persona of those requiring liquidity before a transaction occurs. Devising an electronic trading protocol that decreases the stage of anonymity and may, thus, be better suited to trade less fluid supplies is a demanding yet undertaking task for the future. We empirically investigate if the stage of dealer anonymity is associated to the probability of information-based trading. We use facts and numbers from the German supply market where non anonymous traditional floor founded swaps co-exist with an anonymous computerized trading system. We continue the form of Easley, Kiefer, O’Hara, Paperman (1996) to permit for simultaneous estimation for two aligned markets. We find that the likelihood of acquainted dealing is significantly lower in the floor founded dealing system. We farther article that the dimensions of disperse and the harmful assortment constituent are positively associated to the approximated probabilities of information based trading (Grammig, Schiereck & Theissen, 2000).

Cost breakthrough in floor-based and electrical devices swaps utilizing facts and numbers from the German supply market. We find that both markets assist to cost discovery. There is Bi directional Granger causality, and charges from both markets adapt to deviations from the long-run equilibrium. We use two distinct assesses of the assistance to cost breakthrough, the information share (Hasbrouck 1995) and the weights with which the sequence go in the widespread long memory component as characterized by Gonzalo, Granger (1995). The assistance of the two dealing schemes to the method of cost breakthrough are nearly identical when transaction charges are utilized for the estimation. Models founded on extract midpoints show that the electrical devices dealing scheme have a bigger share in the price breakthrough process. A cross-sectional investigation discloses that the assistance to cost discovery are positively associated to the market portions of the dealing systems. An investigation of the cross-sectional determinants of the assistance to cost breakthrough reveals that the assistance of the dealing schemes are positively associated to their market shares. The relation between the relation dimensions of the bid-ask disperse and the assistance to cost discovery is, at best, weak. We article an affirmative relative between the total dealing capacity and the assistance of IBIS to cost discovery. Taken simultaneously, the outcomes therefore suggest that, first, floor dealing systems are not inevitably inferior to electrical devices open restrict alignment publications in periods of assistance to price breakthrough and that, second, the benefits of electrical devices dealing schemes are more pronounced for more fluid stocks (Theissen, 2001).


3.1 Method of Data Collection

Secondary data of the variables KSE 100 Index stock returns, market capitalization and volatility has been collected to measure the difference of floor trading and Electronic system on liquidity. Monthly data over the period January 1998 to June 2008 has been employed. The choice of a monthly frequency is consistent with previous work (Degryse & Achter, 2001) which examines the variables in relation with the returns. The price impact of realized trades is much smaller than that of trades executed under a naive trading strategy that ignores monitoring of the book and stays almost constant along different trade sizes.

3.2 Sample Size

Monthly data of Stock returns of KSE 100, Market Capitalization, Volatility and turnover has been collected for the period of 10 years since January 1998 to June 2008. Data has been gathered from State Bank of Pakistan (SBP), Karachi Stock Exchange (KSE) to examine the difference of floor trading and Electronic System on Liquidity.

3.3 Research Model Developed

The fundamental endeavor of this analysis is to conclude whether information, specifically Electronic System, gives incremental information in comparison with trading through floor concerning the behavior of returns. While at least some work has been conducted at the market level. (O’Hara (1995), Harris (1997), Salomon Smith Barney, (2001). To analyze the comparison between returns of Floor trading and Electronic system after it has been implemented.


4.1 Findings and Interpretation of the Results

Group Statistics




Std. Deviation

Std. Error Mean


Floor Trading





Electronic system






Floor Trading





Electronic system






Floor Trading





Electronic system






Floor Trading





Electronic system





The descriptive table exhibits the sample size, mean, standard deviation, and standard error for both groups. Total sample size used for the analysis is 114 out of which 60 responses were taken from floor trading and 54 responses were taken from electronic system .In this study Volume, market capitalization, volatility and turnover are taken as variables which were used to show the variation between liquidity and floor- trading after the implementation of electronic system. Mean value of volume on floor trading is 1452.0222 as compared to electronic trading that is 7416.3591. Independent t-test was used to compare the difference between the floor trading and electronic system on liquidity. Mean is taken as average and std.error of mean is calculated as standard deviation divided by the square root of the sample size.

Independent Samples Test

Levene’s Test for Equality of Variances

t-test for Equality of Means

95% Confidence Interval of the Difference




Sig. (2-tailed)

Mean Difference




Equal variances assumed








Equal variances not assumed 







Equal variances assumed








Equal variances not assumed







Equal variances assumed








Equal variances not assumed 







Equal variances assumed








Equal variances not assumed






The method makes two checks of the distinction between the two groups. One check assumes that the variances of the two assemblies are equal. The Levene statistic tests this assumption. With the test table rotate so that assumptions are in the level, the Equal variances assumed panel is displayed. The t column displays the observed t statistic for each sample, calculated as the ratio of the difference between sample means divided by the standard error of the difference. The Mean Difference is obtained by subtracting the sample mean for the second set from the sample mean for first set. The 95% Confidence Interval of the distinction provides an estimation of the limitations between which the true mean difference lies in 95% of all possible random samples.

4.2 Hypotheses Assessment Summary

The hypothesis of the study was to identify the difference of floor trading and electronic system on liquidity. This table shows the statistical result about the rejection and acceptance of the hypothesis.





There is a significant difference between floor trading and electronic system on liquidity.





5.1 Conclusion

The world proposes proceed away from the floor-based dealing scheme to an electrical devices dealing system. This tendency in the direction of automation raises the significant inquiry of the relation efficiencies of the two dealing means this topic by matching the trade execution charges for the widespread supply of alike companies in an automated restrict alignment and a floor-based market structure. This study is of specific concern to controllers, economists, investors, and supply swaps that are contemplating the conceive of dealing structures. The automation decreases transaction costs considerably. ATS are the exponent of automated schemes and should thus be more thriving in the United States. Our empirical work displays that automation also has a important influence on dealing charges, but still less considerable than in an international context.  Markets are mostly coordinated as an auction market where traders can submit market and restrict orders. ECNs permit investors to trade with each other by a restrict alignment publication without the intervention of a dealer.   Thus affray appears to be more significant than fragmentation of markets. The outcomes on market deepness are inconclusive. ECNs reduce the informational effectiveness of the market. The cause is that ECNs normally permit for anonymous dealing, premier to a boost in the harmful assortment constituent of the spread. Crossing systems depend on cost breakthrough at the prime exchange while ECNs dynamically assist to the cost breakthrough process. Currently, dealing capacity on alternate dealing schemes is rather low compared to the established market places.

5.2 Implications and Recommendations

This study helped various investors, and other research conductors in analyzing and observing the behavior of liquidity in comparison between floor-trading and electronic system. Research students further work on the electronic system between the cities using intranet technology and study other variables that may influence the liquidity. In this analysis the major issue faced was availability of the data. The research limitations forced authors to measure the data of only returns.

This research was limited to the only Liquidity of returns of Karachi Stock Exchange of Pakistan. The data were taken from January 1998 to June 2008 due to data availability constraint. It suggested that such type of study should be carried out with a large sample size and in other countries of Asia as well, as to have comprehensive idea about evolution of Electronic system. Moreover, it also suggested that other factors except ones examined in this study should be researched as to have perfect idea about returns behavior. Besides that, this study can also be replicated in other developing countries.

5.3 Future Research

This research can further be studied by using cads as by implementing the electronic system of intranet to different cities and compare the results with the current research. This helps to compare the liquidity between different areas and helps to analyze the change that is taking place due to evolution of electronic markets.


Barclay, J. M., Hendershott, T. & Mc Cormick, T. D. (2003). Competition among Trading Venues: Information & Trading on Electronic Communications Networks. The Journal of Finance, 8.

Benhamou, E. & Serval, T. (1999). On the Competition between ECNs, Stock Markets & Market Makers. The Journal of Finance.

Bloomfield, R. Maureen, H. & Saar, G. (2003). The “Make or Take” Decision in an Electronic Market: Evidence on the Evolution of Liquidity.

Christie, G. W., Harris, H. J. & Schultz, H. P. (1994). Why Did NASDAQ Market Makers Stop Avoiding Odd-Eight Quotes? The Journal of Finance, 49, 1841-1860.

Degryse, H. & Van Achter, M.(2001). Alternative Trading Systems & Liquidity. The Journal of Finance, 49, 1994-2000.

Domowitz, I., Jean, M. & Frank, P. (2001). Liquidity, Transaction Costs & Reintermediation in Electronic Markets. The Journal of Finance, 49, 1941-1960

Goldstein, A. M. & Kenneth A. Kavajecz, A. K. (2003). Trading Strategies during Circuit Breakers & Extreme Market Movements. The Journal of Finance, 49 , 1871-1890

Grammig, J., Schiereck, D., Theissen, E. (2000). Knowing Me, Knowing You: Trader Anonymity & Informed Trading in Parallel Markets. Journal of Financial Economics, 213-237.

Huang, R. D & Stall, R. H. (1995). Dealer Versus Auction Markets: A Paired Comparison of Execution Costs on NASDAQ & the NYSE. Journal of Financial Economics, 313-357.

Kemp, A

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