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Ebook Advances in quantitetive analysis of finance and accounting (Vol 2): Part 2

(BQ) Part 2 book “Advances in quantitetive analysis of finance and accounting” has contents: CFA designation, geographical location and analyst performance; asset pricing with higher moments - empirical evidence from the taiwan stock market, and other contents. | July 13, 2005 13:46 WSPC/B272 ch06.tex Chapter 6 Intraday Trading of Island (As Reported to the Cincinnati Stock Exchange) and NASDAQ Van T. Nguyen University of Mississippi, USA Bonnie F. Van Ness University of Mississippi, USA Robert A. Van Ness University of Mississippi, USA On March 18, 2002, Island began reporting its trades to the Cincinnati Stock Exchange. This change in reporting allows us to examine Island’s trading behavior. We find distinct intraday patterns for the number of trades and volume. Both NASDAQ and Island exhibit intraday U-shaped patterns for the number of trades and volume, however, the difference in the two also shows a U-shaped pattern. In addition, we analyze the probability of informed trading around the reporting change. We find no difference in the probability of informed trading on NASDAQ and Island following the change, as well as no significant difference in the probability of informed trading for NASDAQ before and after the change. Keywords: Intraday patterns of volume; probability of informed trading; electronic communication networks; Island; NASDAQ market system. 1. Introduction On March 18 of 2002, Island, NASDAQ’s largest Electronic Communication Network (ECN) began reporting trades to the Cincinnati Stock Exchange (CSE). Previously, trades on Island were reported to NASDAQ.1 Island initiated this reporting change as a cost savings move.2 The arrangement between the CSE and Island involves a revenue-sharing and rebate plan, where the CSE sends back part of the revenue it makes by packaging and selling Island’s trading data to other financial institutions. Island gives some of that money back to its customers in the form of a rebate which, in turn, helps them increase market share in NASDAQ stocks. This reporting change allows us to study Island’s 1 Island announced that the reporting of quotes to the CSE would begin at a later point in time. 2 For more information about this move, see Nguyen, Van Ness and Van Ness .