Macquarie University
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Can You Trade Without Markets?

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posted on 2023-02-17, 03:45 authored by Kin Soon Lim

This dissertation provides an investigation of how non-orderbook trading impacts market quality. Non-orderbook trading mechanism allows traders to participate in the market outside the conventional continuous limit order exchanges. It is composed of three empirical essays examining the trading activity in stock opening auction, closing auction, and dark trading environment. This thesis illustrates the recent path of market evolution and addresses the gaps in the empirical market microstructure literature related to market fairness, liquidity, and efficiency.  First, this dissertation identifies the motivations, characteristics and effects of opening price manipulation using a unique sample of prosecuted manipulation cases in Australia. Detailed order-level data document significant increases in order amendment immediately prior to manipulated opening auctions. Based on these findings, an index is developed to measure the probability and intensity of opening price manipulation. Applying the index to a sample of opening auctions from 2016 to 2021, the results show that potential manipulation remains a persistent issue, particularly around futures expiry dates. The index can be used by regulators and exchanges seeking to identify potential opening price manipulation, as well as by researchers who lack access to prosecution data.  Second, an investigation is conducted on the impact of COVID-19 pandemic on the quality of closing call auction. The closing call auction is an important feature of modern markets and improves the efficiency of closing prices. COVID-19 has had an unprecedented impact on financial markets, this thesis examines the effect of COVID-19 and the role of high-frequency and retail trading on closing price dislocation and efficiency. It is reported that closing prices are severely dislocated and inefficient during COVID-19. This effect at the close is exacerbated through significant increases in retail trading activity and reduced liquidity iv   provision and trading by high-frequency traders. The findings from this thesis have significant implications for applications which rely on efficient closing prices, such as valuing financial securities and benchmarking performance.  Third, this thesis examines whether the increase in the level of dark trading has contributed to a more toxic market using a sample of S&P100 index constituents from 2014 to 2021. Here, toxicity refers to the willingness of liquidity providers to participate in the market and its resulting transaction cost and price impact. It is measured using market quality variables such as quoted spreads, effective spreads, realized spreads, and price impact. The results demonstrate that the increase in the fraction of dark trading contributes to higher quoted and effective spreads, indicating higher transaction costs in the lit market. Higher dark market share also contributes to lower liquidity providers’ revenue and larger price impact. By decomposing dark trading into institutional midpoint and subdecimal retail trades, the results show that retail trades that are made up of mainly payment for order flow make the lit market more toxic. Lastly, dark trading is not entirely harmful and there is evidence that it is beneficial if kept within a desirable range.


Table of Contents

Chapter 1. Introduction and Overview -- Chapter 2. Identifying and Characterising Opening Auction Manipulation -- Chapter 3. The Impact of High-frequency and Retail Trading on Closing Price Auctions During -- COVID-19 -- Chapter 4. Does Segmentation Make Modern Markets Toxic? -- Chapter 5. Conclusion -- References

Awarding Institution

Macquarie University

Degree Type

Thesis PhD

Department, Centre or School

Department of Applied Finance

Year of Award


Principal Supervisor

Sean Foley

Additional Supervisor 1

Petko Kalev

Additional Supervisor 2

Huu Nhan Duong


Copyright: The Author Copyright disclaimer:




147 pages