View metadata, citation and similar papers at core.ac.uk brought to you by CORE European Online Journal of Natural and Social Sciences 2013; provided by Europeanwww.european-science.com Online Journal of Natural and Social Sciences (ES) vol.2, No.3 (s), pp.109-115 ISSN 1805-3602 The impact of liquidity and transparency in the financial markets: A case study in Tehran exchange

Maryam Noori, Saeed Anvar Khatibi Department of Accounting, Ilkhchi Branch, Islamic Azad University, Ilkhchi, Iran

Abstract nificant economic benefits with it.Furthermore, it can reduce the effects of inflation leading to li- One of the topics addressed in the capital mar- quidity in the community. Economic decisions re- ket is liquidity and transparency in the financial quire information with which available resources markets. Transparency is one of the major issues in can be allocated in an optimal manner. One of the Trading based on the forum, and electronics sys- most important factors in making appropriate de- tem. The purpose of this study was to investigate cision is appropriate information relevant to the de- the effect of access to transparent stock informa- cision issue that if not properly processed and will tion for decision-making. Qualitative approach was have negative effects on the decision maker. On the used for sample selection, data collection, analysis other hand, type and how to access information is and conclusions. Data collection methods and in- also important. Whereas information required are struments are in-depth interviews. Sampling meth- asymmetrically distributed among individuals, can od was purposive,useful and was usedfor determin- cause different results on the same issue. So, be- ing the size of the sample theory saturation. Results cause personal information is important for the in- obtained from this study indicate that liquidity and dividual, this is determining the quality of the data transparency are effective in information about distribution that must be carefully evaluated. In the quality increase. capital markets, related information will form the primary basis of the transaction, therefore infor- Keywords: Quality of service, li- mation is known as the most valuable assets in the quidity, transparency of information, . capital markets. In general, we can say that one of the main objectives of stock exchanges is to ensure Introduction a fair, efficient and transparent functioning of mar- kets. Therefore planners and legis- Stock Exchange is one of the most important lators are trying to overcome the obstacles of supply institutions in the capital markets. The main task and demand, because in this way the price of finan- of the Stock Exchange is to provide a fair and trans- cial assets becomes closer to its intrinsic value. In parent market for trading, market operations and the 1990s, many researchers paid attention to con- activities of its members. as an official trol price fluctuation mechanisms and tend to re- market is the most important authority in charge strict price changes, with the aim of preventing fi- of recruiting, appropriate organizing of wandering nancial crises increased. Price control mechanisms financial resources and gathering liquidity of the are handled in order to protect before society and leading it toward the production units. sudden changes in stock prices (Shahrabadi, 2010). In addition to moving the wheels of the economy In financial markets, fluctuation mechanismcon- through the provision of needing capital projects, trols are used in two main forms including: reducing government intervention in the economy, A) Trading halt, which prevents a transaction of and also increasing tax revenues, brings along sig- a Stock Exchange sheet or whole market in a speci-

Corresponding author: Maryam Noori, Department of Accounting, Ilkhchi Branch, Islamic Azad University, Ilkhchi, Iran. E-mail: [email protected].

Copyright © Maryam Noori and Saeed Anvar Khatibi, 2013 European Online Journal of Natural and Social Sciences; vol.2, No. 3 (s), pp. 109-115

109 Social science section fied period on essential conditions or according to transparency have not such a meaning. In forum- market officials based systems, there is a certain degree of trans- B) Amplitude Price, which determine the max- parency about the composition of the Board during imum allowable price change or the trading price the order. Quotes, which are based on the gener- difficulties for a sheet a day. al market level have less transparency than market Some Exchanges in order to prevent fluctua- auction. Many studies have shown that increased tions, apply price limits to Stock Exchange prices. transparency can lead to increased liquidity and Price range meansnot letting the bargainbe more may reduce transaction costs. Contrastively based or less than the price range. Sometimes in some on other studies, transparency can reduce liquidity , this restriction is only applied to reduce the in the market because many participants are not in- price. Price limit differs from a trading halt because terested in making public policy and therefore they cost of constraints are based on price changes and do not involve in the market. Besides, in the case when the price reaches the desired level, stopshap- of the reduction of transparency, informed traders pening automatically. will have better status than before and the investors Increased market access, along with traditional who are not informed will have worse status. Thus, broker - dealer systems and providing direct access informed investors tend to reduce the transparency to the market, leads to increase in various trading of the market because traders will be better able to strategies and investors. Also providing the possi- take advantage of Personal Information. Converse- bility of online transactions in the stock exchange ly, other investors are willing to increase transpar- leads to increase in participation of retail inves- ency. Also, in case of reduction of the transparency tors in particular active investors, and also improve of the market; traders more are likely to delay their (Madaheasl,2008).. trades in order to collect information from the trad- Increased investment products available in the ing activities of other participants. The results of the market, particularly derivative instruments, open a studies indicated that the reduction in transparen- variety of different product choices to investors with cy reducedtransaction costs, priced and trading strategies, risk appetite and different invest- market efficiency increased. The results show that ment horizons. More importantly, investors are at- there is a linear relationship between transparency tracted to the market with a wide range of invest- and market efficiency, in other words the extent of ment products to reduce the capital risk. In this market efficiency, increases transparency, but com- context, according to the marketing instructions, plete transparency seems highly unlikely (Malrki, providing appropriate rating, sets the ground for Madaheasl, 2008). more prisons. In another study, the relationship between transparency and market price fluctuations has been Review of the Related Literature studied using a theoretical model. This review fo- cuses on information transparency of traders’ order In microstructure analysis, market transparen- with liquidity motivation tradersandmakes distinc- cy, which is one of the most important issues in this tion between the public and private access to infor- field, is usually defined as the ability of market par- mation. In this model, the market is more transpar- ticipants to observe information in the trading pro- ent in terms of public information, that traders have cess. The information in this report means prices more access to the volume of flow of order informa- and quotes, trading volume, origin and source of the tion.However, a market is consideredmore trans- order and identity of market participants. In other parent in terms of information that most of the or- words, what is the volume of information released to ders flows are substantially determined by each of the public, who have received the information and the informed traders know (without other traders when is the information released, are the main ele- become aware of it). Results of this study indicate ments measuring the degree of market transparency that when the orders of traders with liquidity moti- (Jafarpour, 2004, as cited in Mohammadi, 2008). vation can benefit from appropriate price fluctua- Transparency is one of the major issues concerning tions, increasing the transparency of public infor- trading systems based on the forum and electron- mation to a certain degree reduce the rate of price ic systems. Fully automated trading systems, due to fluctuations but after going through it, because of the impossibility of separating the elements in order, the incidence of two effects, it leads to increase in

Openly accessible at http://www.european-science.com 110 Social science section price volatility. The first is awareness of the order ducted in a cost effective manner.Liquidity in the for traders provide the opportunity to submit or- reduce investors’ costs by reduc- ders in order of transitory shocks violence, and sec- ing range of fluctuations and transaction costs and ond awareness of the order flow, can reduces the provides access to different investors with differ- price sensitivity of traders and consequently leads ent trading strategies. As Daemkar (1999) remarks, to larger price movements in response to demand cash markets with transaction costs reduce by al- shocks. When the transparency of order flow is low, lowing investors to enter and exit without creating the first effect is dominant and more information the least disruption and decline in the value of fi- about the orders leads to price fluctuationreduc- nancial asset. The more the market liquidity, the tions. Once transparency about information order more likely it is to adapt an increase in the optimal flow is high, the second effect dominates and thus order. Since investors turn to the markets that have more information about the flow of order leads to higher liquidity, consequently this subject is consid- more pricefluctuations. In other words, in identical ered to be an important in the growth and develop- circumstances, any increase in price will reduce the ment of markets. Liquidity in the financial markets transparency of personal information. And, it is for is influenced by several factors. Also, the influ- this reason that different traders have different in- ence of these factors varies in different markets. formation about the flow of orders that have led to Based on the studies conducted factors such as con- restrictions on the latter effect (Department of Eco- centration of ownership, the level of free floating nomic Studies and Market development, 2008). share, external intermediaries, market access, trade Based on the results of research conducted on through Internet, capital account liberalization, the relationship between transparency and effi- trade and infrastructure costs, tools and products, ciency, increase in transparency cannot be regard- additional adaptation, participation of retail in- ed as the main factor of market efficiency. However, vestors, stock exchange restructuring, cooperative OTC market studies show that the more transpar- governance,quality of listed companies, increasing ency can contribute to moremarket liquidity be- the trading hours of meetings and market manager cause of more participation of the investors. It also is effective in increasing liquidity. In a general clas- seems efficiency impacts heavily depend on infor- sification factors affect liquidity can be divided into mation structure. In case there is little fundamen- macro and microstructure market factors. Micro- tal information on transactions, more transparency structure deals with analysis of the market impact of will not necessarily improve performance (133-14, trading mechanisms can have an influence on the return) , May 131). Even in price formation process. Among the application of some cases, more transparency acts as a deterrent to financial knowledge remark regulation, design and market makers acting in compliance situations. In definition of appropriate transaction mechanisms fact, in a market with a high degree of transparency (Tehran Stock Exchange, May 14). Lack of mar- of information,some investors request reduction in ket liquidity as one of the key elements of develop- certain types of information. ment will have adverse effects on the formation and price discovery as the primary features of markets. Liquidity According to Easingwood (1986), liquidity requires sufficient free float share ofliquidity in order to ac- Considering liquidity in the market is impor- tively transact by investors especially legalinvestors. tant. Lack of market liquidity as one of the key el- The free float share is the part of company that is ements in developing markets, adversely affects not controlled by the government and the compa- price formation and discovery of useful features, ny’s shareholder.In other words, the proportion of a which are the main features of work markets (Sa- company’s stock traded on the market and manage- deghi Sharif and Fadaiyannejhad, 2010). However, ment purposes which is not controlled by the share- what the wants fromthe financial market holder in the transaction process is called free float is enough liquidity in the market. Liquidity refers share.It can be concluded from the studies that en- to the ability of the market to absorb large volumes hanced liquidity leads to increase in investor con- of transactions without causing volatility in pric- fidence and therefore continued growth and more es. Among features of markets with high liquidity, stability of the market.Improved liquidity and the alow distance between proposed purchase and sale possibility of rapid changes in share price, leads to price which consequently transactions will be con- exchange attraction to companies listed in the ex-

Openly accessible at http://www.european-science.com 111 Social science section change for investors. Companies can also use this the barriers to trade in this market, for example, to- as a tool to attract new partners and joint invest- day an investor can just push a button to transact the ment.The free float share is one of effective vari- securities without having to go to a LIFFE or Glo- ables on increasing liquidity, market depth and effi- bex, Eurex, have a on extra inter- ciency. Liquidityrequires a higher level of free float mediaries or special participant; this would create a share for companies. Studies show increase in the global competition in the field of financial markets. free-flight share reduces the possibility to price ma- • Increase transparency: Because the electron- nipulation, and intrinsic valuemanip- ic transactions lead to a flow of information in the ulation gets close to fair price. Many exchanges for world and is in an electronic form, enabling more their index indicate the exact of the market, accurate price discovery and transparency has in- involve the free float shares in the index calculation creased. formulas. Many exchanges keep pace with market • Reduction of the difference between buy- growth, in order to increase efficiency and access ing and selling, which is because of an increase in of investors to capital markets, look for technolo- transparency, liquidity and competition in the fi- gy-based solutions. The aim of this work is to facili- nancial market. tate the flow of investment to markets. Exchanges The public offer of shares prepares the ground to try to organize and use resources more accessible to buy and easy to sell the property easily, this feature market participants above traditional broker- dealer increases the attractiveness of securities for inves- server systems. Furthermore, with the globalization tors. Improved liquidity and the possibility of rapid of markets and increasing in competition exchang- changes in share prices, leads to more attraction of es in order to absorb order from other countries the shares of companies accepted in the exchange list exchanges should be able to consolidate its position for investors. Companies can also use this as a tool and build an efficient way for investors to access to attract new partners and joint investments (Ross, to the markets. The aim of technological develop- 1989; Easingwood and Storey, 1991; Creswell, 2007; ment of the secondary market is to take advantage Mack, 2005). of improved market access and using different trad- Once sufficient information about a company’s ing models. However, new technologiesare the rea- stock price will be listed in the public domain, ana- son for the development of market structures such as lysts, investors and financial intermediaries who are increased capacity, and complex transaction mod- willing to invest in shares in the company, examine els etc. All of these factors increase market liquid- share price, financial condition, market conditions ity. Direct access to the market, development ofin- and the condition of the product, put comments terface technology, and remote access are among through recommendations to buy or sell shares. the mechanisms used (Alipour and Sadeghis- The information isimportantbecause they reflect haref, 2009). The increasing demand of customers the viewpoint of the company and its stock market and market participants to access global markets, and that the company can consider it in planning also lead to continuous innovation in access to the for their future. means of the market. New legislation, for example, online trading and electronic trading systems can Methodology be important in exchange efficiency among the ef- fects of their use, including: In this study, we investigated the liquidity and • Reducing the cost of transactions: This due transparency isinformation aboutquality of stock to reduction in extra costs is because of shortening service. According to Miles and Huberman (1994, of the transaction process (so that an increase in the as cited in Marvasti, 2004), a qualitative approach volume of transactions has not led to a significant is an appropriate method for this study. increase in the level of costs). As the research aims at investigating the rela- • Increase the liquidity volume: Electronic sys- tionship between liquidity and transparency on the tems create the possibility of different people deal quality of information on the effects of stock and with each other regardless of the distance they have, security services, to achieve the goal, in addition to that leads to more involvement of investors and in- the generalized, a closely related subject is required. crease liquidity in the financial markets. To find out full and detailed information, consid- • More competition: Presence of electronic ering research issue qualitative research is used. In trading on financial markets has removed many of sample selection, data collection, analysis, and con-

Openly accessible at http://www.european-science.com 112 Social science section clusion will be used to answer research questions. In researcher has gained knowledge from research and this researchconsidering the topic and the variables achieved recognition in Iranian stock, sampling two types of information will be used. methods based on objective and theoretical satura- 1- Secondary data from various sources of in- tion is usedto illuminate the sample size. Under the formation that may be collected through library re- terms of references as well as increased reliability search. and validity of the research, interviews with all rel- 2- The primary data for this study was collected evant departments who are engaged in the activity from the interview technique, which is used to veri- will be carried out. fy the effectiveness of data collected. It should be noted that the field and library Research Model methods were used as data collection methods. The research population of this study includes Given that the liquidity and transparency of in- comprehensive marketing system Committee in formation can make a positive impact on improving stock. Statistical analysis unit of this research is the- Stock Exchange services and in case of the proper brokerage firms of Tehran Stock Exchange and its- planning of the implementation of competitive ad- sample is chosen from the population. Components vantage and clear information sustainable develop- to determine the sample population in this study ment, the stock market boost can be achieved. In included population size and diversity. Because the view of the above, the following model is offered:

Figure 1. The model used to study the relationship between liquidity, transparency, and investment.

Data Analysis methods should be mentioned. The following codes are defined in the framework of theories.Positive Principal components of analysis of the select- (+)shows that the theory with data collected from ed approach are objective and research questions, Tehran Stock Exchange are supported, negative (-) Based on the research objective analyzing approach shows that the theory with data collected from Teh- in this study it will be used after the data collection. ran Stock Exchange are not supported, - / + says The data samples are collected, then the analysis is that data collected from Tehran Stock Exchange are performed, and finally the data are analyzed based supported partially. on authority references. Also, based on the research type, which is a case study, deductive method is Liquidity and Transparency used and the data were analyzed by using pattern matching method and comparison theory. In quali- Based on data collected from interviews con- tative research, the researcher ultimately uses a sub- ducted all believed that increased liquidity and jective interpretation of the data collected, and to transparency, increases service quality of The Stock increase the reliability of the study, interpretation Exchange of Tehran. Items 1, 3, 4, 5, 6, 7, 8, 11 be-

Openly accessible at http://www.european-science.com 113 Social science section lieved thatincreased control over the Tehran Stock investors by Tehran Stock Exchange does increase Exchange market, increase the quality of services in in service quality of Tehran Stock Exchange and in- Tehran Stock Exchange. And all interviewees be- creasequality of service and increase investment in lieved that disclosure of listed companies in Teh- the stock. The following table summarizes the data ran Stock Exchange, by Tehran Stock Exchange in- obtained from each participant on how to improve crease service quality and investment in the stock. service quality by increasing the liquidity and trans- Also, all items believed that creating confidence in parency in Tehran Stock Exchange.

Table 1. Data for each participant about service quality improvement.

Item Item Item Item Item Item Item Item Item Item Item Interview items 11 10 9 8 7 6 5 4 3 2 1 Liquidity and Transparency + - - + + + + + - - + Increased monitoring and control + + + + + + + + + + + Disclosure of corporate information from the Stock Exchange + + + + + + + + + + + Creating Investors’ confidence and trust in the Tehran Stock Exchange

+means it is expressed by interviewee,-means it is not expressed by the interviewee.

Results tigate liquidity and transparency in increasing ser- vice quality and also increasing investment in the Data collected from Tehran Stock Exchange Tehran Stock Exchange and to attract customers of suggests that the liquidity and transparency of the other financial markets to the capital market. The investment funded by Tehran Stock Exchange leads results of the study show that the results of expert to increase service quality of Tehran Stock Ex- professionals and staffs in Tehran Stock Exchange change and the service quality improvesit to in- was interviewed until data saturation, showed li- creases investing in the stock market and the at- quidity and transparency factor can be considered traction of new customers. The analysis of the data as an integrated financial market and the factors collected about the liquidity and transparency so- that largely affect the improvement of the quality of that three factors were important in increasing ser- the Tehran Stock Exchange. This study also dem- vice quality. The analysis of the data collected about onstrated that more activity and focus on the Teh- the liquidity and transparency also show that firms ran Stock Exchangecan increase the service quality listed on the stock market has a significant effect in in order to increase the domestic and foreign invest- attracting customers. This causes the client to re- ment. ceive full details of companies to choose the best According to the results of the study, the re- type of investment that stems from high quality ser- searcher sees itself to make suggestions for future vice of Tehran Stock Exchange. researchers on the present study: According to data collected from interviews, 1. Identifying the factors affecting the produc- building trust and confidencehavethe greatest im- tivity and efficiency of the Tehran Stock Exchange. pact on improving services and increasing invest- 2. Ranking factors, affecting the productivity ment in Tehran’s Stock Exchange. and efficiency of the Tehran Stock Exchange. 3. Investigating ways to attract customers to Conclusions and Suggestions for Future other financial markets, towards the capital market Research of listed companies in Tehran Stock Exchange. 4. Evaluation of strategies to attract customers The main objective of this study was to inves- and foreign companies in Tehran Stock Exchange.

Openly accessible at http://www.european-science.com 114 Social science section

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