Wednesday, June 29, 2005

Trading Halts: new evidence from Istanbul

Bildik gives us a interesting look at trading halts. While the data and the halts he looks at are from the from the Istanbul stock market, most of what he writes is similar worldwide.

Trading halt papers are always interesting and often controversial. This controversy comes in part from the underlying controversies surrounding the halts themselves.

"The stated purpose of trading halts is to allow investors an opportunity to react to new information and to facilitate the orderly emergence of a new equilibrium price. It aims to ensure that all investors have fair access to market information when material information comes to the market or any drastic change occurs."

Sounds good right? The problem is that much of the academic literature questions how useful these halts really are. In Bildik's words "opponents argue that halts are an unnecessary barrier to price discovery and do not prevent an increase in volatility following the halts."

Bildik investigates trading halts on the Istanbul Stock Exchange. After a GREAT literature review and a brief description of some microstructure difference between the NYSE and the Istanbul Stock Exchange, he finds that
"return, volume and volatility tend to return to their non-halt period averages in a short period of time after trading is resumed. Most of the information is absorbed by the prices within fifteen minutes (most completely in an hour) following the resume of trading after the halt. In general, results are robust to the time-of-the-halt and the duration of haltÂ’s effects. Halts clearly do not prevent the stock price reaching its equilibrium or spread the volatility out longer periods, it otherwise would have been."
Clearly? Maybe, I am not totally convinced, but ok.

Some other interesting findings:
* "...consistent to previous studies, the reaction of investors to the negative announcements is not only stronger than that of positive news but also lasts longer, which generates short-term under-reaction in returns. Restrictions on short sale, disposition effect, and positive abnormal returns in the pre-halt period seem to be an explanation for this"

* "Even though the duration of halts on the ISE is shorter than on developed
stock markets, the market seems to respond to the new information quicker or at least as quickly as it does in more developed US markets due to a different market microstructure, such as fully computerized trading, price discovery mechanisms based on continuous trading, the non-existence of monopolist specialists, restrictions on order cancellation during trading, investor characteristics and the small size of the market."
While these are all interesting, I may offer the finding that individual investors are still at an informational advantage as the most important finding:
" of the most striking findings of this study are the differences of trading
behavior of individuals, mutual funds, and brokerage houses around trading halts: mutual funds and brokerage houses take the price advantage of the information release ahead of the individual investors by having better timing in trading after the halt since they constantly watch the market. Similar to day traders, institutional investors systematically buy and sell at more favorable prices than non-institutional or individual investors around halts by using this advantage. However, halts facilitate the dissemination of valuable information during the halt period to the large number of investors, and give them a chance to react to the new announcement; halts cannot completely prevent institutional investors and day traders from
exploiting their natural advantage as a result of their professional activity. Obviously, if the trading halts did not exist, the advantage...would have been bigger since there were less informed individual investors...."
So, at least while halts do not totally protect the individual investor, they appear to provide some protection.

Interesting paper. Definitely recommend the lit review!

Bildik, Recep , "Trading Halts and the Advantage of Institutional Investors: Evidence from the Istanbul Stock Exchange" (December 1, 2004).

As an aside, I confess my views on trading halts have softened somewhat. While in school, I had been opposed to them on the grounds they did not really do what they were intended. However, in the past year or so, several conversations with NYSE regulators have persuaded me of at least some benefits (largely with limit orders) that accrue to small investors. (For example, if you had a limit order at 21, and the price were allowed to go up gradually, your trade would execute at 21, whereas if the true price is $25 and this is the price that the stock reopens at, then your trade would be executed at the higher price). Of course this is reversed if you are buying, BUT since there are probably more limit sells than limit buys (at least I would imagine there are), on net, the halt may protect individual investors.

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