Price Stabilization and Discovery Under a Random-End Trading Mechanism

Kyong Shik Eom, Jong-Ho Park
2014 Social Science Research Network  
We study the effects of a random-end (RE) trading mechanism on price stabilization, discovery, and efficiency. Using the real-time order book, we analyzed all RE occurrences on the Korea Exchange (KRX) in 2009 and 2010. The RE trading mechanism promoted price stabilization, but with some reservations. A significant part of this price stabilization effect came from the cancellation or correction of existing orders. The RE trading mechanism improved opening price discovery, but caused
more » ... caused overreaction at the close. Policymakers should impose tighter parameters of the RE trading mechanism on the expiration dates of derivatives contracts than on regular trading days. Abstract We study the effects of a random-end (RE) trading mechanism on price stabilization, discovery, and efficiency. Using the real-time order book, we analyzed all RE occurrences on the Korea Exchange (KRX) in 2009 and 2010. The RE trading mechanism promoted price stabilization, but with some reservations. A significant part of this price stabilization effect came from the cancellation or correction of existing orders. The RE trading mechanism improved opening price discovery, but caused overreaction at the close. Policymakers should impose tighter parameters of the RE trading mechanism on the expiration dates of derivatives contracts than on regular trading days.
doi:10.2139/ssrn.2532455 fatcat:pjudebpmnze5hmcbl75usibhzy