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Korea Stock Exchange& Australian Stock Exchange<br />Stefan Binder<br />Harry Jang<br />Tai Tran<br />2010<br />
ASX<br />KRX<br />KRX<br />ASX<br />Market Cap<br />Trade Value<br />
Background Information<br />Founded 1956<br />2005: Korea Stock Exchange, Korea Futures Exchange and KOSDAQ integrated<br ...
KOSPI & KOSDAQ<br />KOSPI(Korea Composite Stock Price Index)<br />Introduced in 1983<br />All common stocks, bonds and ETF...
source: WFE<br />
source: WFE<br />
source: ASX<br />
Market concentration<br />Top 5% companies<br />KRX 89 companies<br />ASX 94 companies<br />10 largest companies by market...
source: WFE<br />
Price Discovery<br />Best Practice<br /><ul><li>Order-driven: Consolidated, liquidity
Market makers for derivatives: promote liquidity
Call to maximize number of trades: fairness</li></li></ul><li>Trading System<br />KRX<br />Circuit breaker: trading halt<b...
Price no more than ±1.75% from closing price, within lowest & highest price of day
ASX
Institutional investors
$1m
Not for retail investors</li></li></ul><li>The Ban on Short-Sale<br />KRX: Oct 2008 - Jun 2009<br />ASX: Sep 2008 - May 20...
Trading Activities<br />source: WFE<br />
Listing Requirements<br />KRX<br />Size test A$19,000<br />Minority holding<br />At least 5% and A$930,000 offered<br />No...
Tick Size<br />
Regulation<br />KRX<br />KRX facilitates trading<br />Financial Supervisory Service (gov)<br />ASX<br />ASX facilitates tr...
Summary & Suggestions<br />KRX Summary<br />Smaller (MCap) but much more active<br />More diversified<br />Cheaper to list...
Market Structure, Fragmentation, and Market Quality <br />Paul Bennett & Li Wei <br />2005<br />Journal of Financial Marke...
Brief Summary <br />Examined a sample of 38 stocks that switched from NASDAQ to NYSE <br />Significant Improvement in Mark...
Order Flow Fragmentation <br /><ul><li>Quote-driven
Dealers
Competition
Fragmented
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Korea Stock Exchange, Australian Stock Exchange, New York Stock Exchange, NASDAQ; Fragmentation & Market Quality

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This presentation consists of 2 sections

1. An overview of Korea Stock Exchange and Australian Stock Exchange, accompanied by a comparison of the two exchanges

2. A discussion of Bennett & Li "Market Structure, Fragmentation, and Market Quality" article which looks into market fragmentation on New York Stock Exchange and NASDAQ

This was done as part of a project for University of New South Wales

Published in: Economy & Finance, Business

Korea Stock Exchange, Australian Stock Exchange, New York Stock Exchange, NASDAQ; Fragmentation & Market Quality

  1. 1. Korea Stock Exchange& Australian Stock Exchange<br />Stefan Binder<br />Harry Jang<br />Tai Tran<br />2010<br />
  2. 2. ASX<br />KRX<br />KRX<br />ASX<br />Market Cap<br />Trade Value<br />
  3. 3. Background Information<br />Founded 1956<br />2005: Korea Stock Exchange, Korea Futures Exchange and KOSDAQ integrated<br />Rank<br />17th by Market Cap (0.84 trillion)<br />8th by Trade Value (1.6 trillion)<br />1st in derivatives trading<br />2nd in liquidity (trading value scaled by MCap)<br />
  4. 4. KOSPI & KOSDAQ<br />KOSPI(Korea Composite Stock Price Index)<br />Introduced in 1983<br />All common stocks, bonds and ETFs traded<br />770 firms listed<br />KOSDAQ(Korean Securities Dealers Automated Quotations)<br />Established in 1996, benchmarked NASDAQ<br />Electronic screen-based securities trading market<br />Provides flow of funds to small, medium and venture corporations<br />1011 firms listed<br />
  5. 5. source: WFE<br />
  6. 6. source: WFE<br />
  7. 7. source: ASX<br />
  8. 8. Market concentration<br />Top 5% companies<br />KRX 89 companies<br />ASX 94 companies<br />10 largest companies by market cap<br />
  9. 9. source: WFE<br />
  10. 10. Price Discovery<br />Best Practice<br /><ul><li>Order-driven: Consolidated, liquidity
  11. 11. Market makers for derivatives: promote liquidity
  12. 12. Call to maximize number of trades: fairness</li></li></ul><li>Trading System<br />KRX<br />Circuit breaker: trading halt<br />ASX<br />No circuit breaker<br />Most stable exchange 1999-2009<br />Off-Market Trading<br /><ul><li>KRX
  13. 13. Price no more than ±1.75% from closing price, within lowest & highest price of day
  14. 14. ASX
  15. 15. Institutional investors
  16. 16. $1m
  17. 17. Not for retail investors</li></li></ul><li>The Ban on Short-Sale<br />KRX: Oct 2008 - Jun 2009<br />ASX: Sep 2008 - May 2009<br />Buy Puts  less impact from derivatives<br />
  18. 18. Trading Activities<br />source: WFE<br />
  19. 19.
  20. 20. Listing Requirements<br />KRX<br />Size test A$19,000<br />Minority holding<br />At least 5% and A$930,000 offered<br />No. of owners with voting right at least 1,000<br />Financial test (1 of 3)<br />Sales A$27m + Profit A$2.3m + ROE 5%<br />Sales A$46m + MCap A$93m<br />Sales A$65m + Mcap A$46m + OCF A$1.9m<br />Flexibility<br />More focus on financial performance<br />Higher<br />ASX<br />Size test A$10m<br />Profit test A$1m<br />Shareholding: 500 x $2,000 or 400 x $2,000 and 25% held by unrelated parties<br />Asset test: tangible A$2m, working capital A$1.5m<br />
  21. 21.
  22. 22. Tick Size<br />
  23. 23. Regulation<br />KRX<br />KRX facilitates trading<br />Financial Supervisory Service (gov)<br />ASX<br />ASX facilitates trading<br />ASIC (gov) & ASX co-regulate<br />
  24. 24. Summary & Suggestions<br />KRX Summary<br />Smaller (MCap) but much more active<br />More diversified<br />Cheaper to list and trade<br />More price control<br />Suggestions for ASX<br />Review fee structure<br />Reduce tick size<br />Joint venture programs<br />
  25. 25. Market Structure, Fragmentation, and Market Quality <br />Paul Bennett & Li Wei <br />2005<br />Journal of Financial Markets<br />
  26. 26. Brief Summary <br />Examined a sample of 38 stocks that switched from NASDAQ to NYSE <br />Significant Improvement in Market Quality <br />Order Flow Fragmentation affects the market quality, especially for less liquid securities<br />
  27. 27. Order Flow Fragmentation <br /><ul><li>Quote-driven
  28. 28. Dealers
  29. 29. Competition
  30. 30. Fragmented
  31. 31. Hybrid
  32. 32. Specialists
  33. 33. Monopoly
  34. 34. Consolidated</li></li></ul><li> Motivations<br />Optimal market design to facilitate the flow of funds: NYSE vs. NASDAQ/ Monopoly vs. Competition <br />Impact of market structure on market quality (spread, volatility, price efficiency)<br />Same securities on different markets, different market quality: why?<br />Traders: Where to trade & minimize Transaction costs <br />
  35. 35. Research Questions<br />Difference in spread, volatility, price efficiency between NYSE and NASDAQ?<br />Reason for this difference?<br />Impact of order flow fragmentation on market quality improvements<br />
  36. 36. Method/Results<br />Recent sample of 38 small and less liquid stocks that switched from NASDAQ to NYSE <br /><ul><li>Huge improvements beginning and end of trading
  37. 37. Contradicts Chan et al 1995 paper!
  38. 38.  Trade-off between order fragmentation and competition</li></ul>38%<br />25%<br />52%<br />
  39. 39. Methods/Results<br />Improvements in Price Efficiency<br />Degree of market fragmentation prior to the switch related to the magnitude of market quality improvement <br />Liquidity (Trading Volume) negatively related to improvements<br />
  40. 40. Conclusion <br />Trade-off between competition and order fragmentation <br />NYSE organisation with market maker more suitable for small less liquid stocks<br />NYSE might be better for dealing with shocks where there is less liquidity in general (Flash Crash)<br />
  41. 41. Critiques<br />Clear practical relevance (reducing Transaction costs, where to trade?)<br />Contradicts Chan et al. Paper<br />Some of the results proven before, so little new information<br />But important to revaluate this question since NASDAQ structure changes continuously <br />Convincing evidence that order flow fragmentation causes lower market quality <br />
  42. 42. Questions that remain <br />Whether this effect is consistent across all size categories<br />Further examine the Trade off <br />Other aspects (apart from order fragmentation) that contributes to optimal market design, i.e. Minimum Tick, Trading Protocols <br />
  43. 43. Questions<br />

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