DOCSLIB.ORG

RULE 394 Written by Eugene H. Rotberg [Original Undated]

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
RULE 394 Written by Eugene H. Rotberg [Original Undated] RULE 394 written by Eugene H. Rotberg [original undated] TABLE OF CONTENTS Introduction I. Rationale for and History of Rule 394 II. Criteria for Approval -- 1941 to 1960 III. Rule 394: 1960 to 1965 A. Best Execution B. The Minimum Commission Rate C. The Sophisticated Investor IV. The Duty of a Broker V. Uncertainty of Standards VI. Exceptions to Rule 394 A. Control Stock B. Charitable Trades C. Error Trades D. Odd-lots E. Unsuccessful Secondaries F. Exempt List 6. Bonds H. Foreign Transactions I. Regional Exchanges VII. Rule 394 and Non-Members VIII. Competition Between Markets Summary and Conclusions INTRODUCTION This report is the result of an inquiry conducted under a Commission order issued pursuant to Section 21(a) of the Securities Exchange Act of 1934 directing a private investigation in the matter of "Rules, Regulations and Practices of National Securities Exchanges Relating to Off-Board Transactions by Member Firms as Agent and Principal in Securities Admitted to Trading on Such Exchanges." Pursuant to the authority granted in the order, certain designated officers of the Commission conducted a series of transcribed interviews with respect to the subject matter of the inquiry. Approximately 2000 pages of transcript were taken with a view toward fully exploring the ramifications of the inquiry. In addition, non- transcribed interviews were conducted with a variety of financial institutions and experts who were intimately familiar with the subject matter. Extensive documentary material was obtained from the New York Stock Exchange and other exchanges pursuant to a subpoena, a copy of which is set forth in Exhibit A. This inquiry was conducted privately. The individuals who were interviewed on the record were given an opportunity to obtain the transcripts of their discussions with the staff of the Commission. The investigation and report, for the most part, concentrate on Rule 394 of the New York Stock Exchange. Although information was obtained in the course of the inquiry from other exchanges in connection with their rules relating to off- board trading by members, this material was evaluated in the context of its relationship to the New York Stock Exchange Rules and its effect on broker- dealers who were members of both the New York Stock Exchange and such other exchanges. Chapter VIII of the Special Study of Securities Markets discussed the interrelationships between trading markets. Section D of that Chapter dealt with over-the-counter markets in exchange-listed securities. It discussed the volume and growth of this "third market," the securities traded, the size of transactions, the participants (both public and professional), the operation of the market and the relationship between exchange markets and the third market. The Special Study found that there was a conflict between the advantages of competition resulting from the existence of the third market and the disadvantage occasioned by a possible impairment of depth on the exchange market. The Study concluded, however, that on balance the advantage of the competition provided by the third market and the potential overall depth outweighed the concern over impairment of depth on the New York Stock Exchange. The Study also noted that the Commission had only sparse information with regard to the third market. The Study pointed out that the existence of dual markets highlighted questions as to whether the Exchange commission rate structure and the restrictions on members executing trades off-board might result in other than the best executions for a public customer. Finally, in view of the foregoing, the report recommended that the Commission devote further and continuing attention to "(a) types and forms of competition and of limitations on competition actually or potentially existing within and among markets, and their impact on the free, fair, and orderly functioning of the various markets; and (b) factors contributing to or detracting from the public's ready access to all markets and its assurance of obtaining the best execution of any particular transaction." This report is a partial fulfillment of that recommendation. The problems of competition between the Exchange and the third market and the quality of executions with respect to dually traded stocks were also brought into prominence by a controversy over the listing on the New York Stock Exchange of the Chase Manhattan Bank. M. A. Schapiro & Co., a non-member dealer which had long maintained a market in Chase stock and had dealt extensively with exchange member firms, while objecting neither to the listing of bank stocks in general nor Chase in particular, objected to the application of Exchange rules which would prohibit members from continuing their customary dealings for their own account and for the account of their customers with the firm. The crux of the problem was Rule 394 of the New York Stock Exchange, the chief subject matter of this study. I. Rationale for and History of Rule 394 The text of Rule 394 of the New York Stock Exchange reads as follows: "Except as otherwise specifically exempted by the Exchange, members and member organizations must obtain the permission of the Exchange before effecting a transaction in a listed stock off the Exchange, either as principal or agent." The Rule in its present form was filed with the Securities and Exchange Commission on [blank in original] 1957, as part of an extensive renumbering and consolidation of Exchange rules. This section of the report deals with the rationale for the Rule and the background and circumstances which led to its adoption. Exchange members state that Rule 394 is designed to preserve and maintain the depth and liquidity of the auction market and that any fragmentation of that market by permitting orders to be executed other than on the floor of the Exchange damages the primary market. This is the basic theory on which the Rule is based. While some of the terms used in this conclusion may seem somewhat vague or not subject to quantification, the general thought is simply that all orders must be brought to one place to insure an efficient, fair and orderly securities marketplace. This position is refined and explained by five basic premises: 1. The fairest market, it is argued, is a market in which all orders are entitled to an execution based on the best price available as qualified by rules concerning precedence, parity and priority of orders. This means that a public customer who places an order on an Exchange expects that he will receive an execution of that order at the price that he sets -- prior to the time that any other person obtains an execution at a price better than the one he brought to the floor. Therefore, if a customer bids $20 for a stock, no other customer who is bidding only $19-7/8 will be able to buy the security if it is offered for sale. The $20 bid is higher in the "auction" and if it is the highest bid, it will take the floor. The Exchange argues that the public customer who places an order with a member firm expects that all of the other public orders of member firms will be brought to the floor so as to increase the possibility of his order being executed at a favorable price. To the extent that the member firm is permitted to execute orders off the floor, the expectations of persons who have left orders on the floor will be frustrated. 2. A second basic principle which underlies Rule 394 is that in an exchange market the specialist should have an opportunity to participate in each transaction. While this concept is not necessarily a sine qua non for a central market, it is bottomed on the realistic evaluation that for most, if not all securities, specialist participation is required. The Exchange is not a continuous auction market in the sense of there always being available public buyers or sellers; rather professional intervention in the market is often necessary in order to assure immediate liquidity at a reasonable price. Ordinarily the specialist will look to the spread between his bid and asked -- the so-called "jobber's turn" -- as a source of profit. To the extent that the specialist is not shown each order and thereby given the opportunity to participate at what may be favorable prices (particularly on block transactions), he will lose "one leg" of his jobber's turn and his opportunity for profit. Stated another way, if the specialist is required to maintain a fair and orderly market by taking positions and supplying securities where needed, he can only reasonably be expected to do so if he is assured that he will see all the buy and sell orders entered by the public through member firms. 3. A third premise on which the current interpretations of the Rule are based is that the exchange market depends upon and uses a tape which records and disseminates facts about transactions. The tape print has two principal purposes: First, it provides a method by which public investors are informed about the execution of the order they have placed with their broker. Secondly, the tape print is designed to attract orders to the floor for execution by openly publicizing the prices, volume and movement of each security on the board. If orders in listed securities are executed off the floor and therefore are not publicly reported, it is argued that brokers and customers may not realize the existence of willing buyers or sellers for a particular security. [Footnote: Rule 394 also can and does serve to insulate the public from information about a transaction. Sometimes, where the price of a transaction is substantially away from the market, approval for off-board trades is granted in order to avoid the disclosure of the transaction on the tape.
Load more

Recommended publications
  • Market Structure and Liquidity on the Tokyo Stock Exchange
    This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: The Industrial Organization and Regulation of the Securities Industry Volume Author/Editor: Andrew W. Lo, editor Volume Publisher: University of Chicago Press Volume ISBN: 0-226-48847-0 Volume URL: http://www.nber.org/books/lo__96-1 Conference Date: January 19-22, 1994 Publication Date: January 1996 Chapter Title: Market Structure and Liquidity on the Tokyo Stock Exchange Chapter Author: Bruce N. Lehmann, David M. Modest Chapter URL: http://www.nber.org/chapters/c8108 Chapter pages in book: (p. 275 - 316) 9 Market Structure and Liquidity on the Tokyo Stock Exchange Bruce N. Lehmann and David M. Modest Common sense and conventional economic reasoning suggest that liquid sec- ondary markets facilitate lower-cost capital formation than would otherwise occur. Broad common sense does not, however, provide a reliable guide to the specific market mechanisms-the nitty-gritty details of market microstruc- ture-that would produce the most desirable economic outcomes. The demand for and supply of liquidity devolves from the willingness, in- deed the demand, of public investors to trade. However, their demands are seldom coordinated except by particular trading mechanisms, causing transient fluctuations in the demand for liquidity services and resulting in the fragmenta- tion of order flow over time. In most organized secondary markets, designated market makers like dealers and specialists serve as intermediaries between buyers and sellers who provide liquidity over short time intervals as part of their provision of intermediation services. Liquidity may ultimately be pro- vided by the willingness of investors to trade with one another, but designated market makers typically bridge temporal gaps in investor demands in most markets.' Bruce N.
    [Show full text]
  • Capital Market Theory, Mandatory Disclosure, and Price Discovery Lawrence A
    Washington and Lee Law Review Volume 51 | Issue 3 Article 3 Summer 6-1-1994 Capital Market Theory, Mandatory Disclosure, and Price Discovery Lawrence A. Cunningham Follow this and additional works at: https://scholarlycommons.law.wlu.edu/wlulr Part of the Securities Law Commons Recommended Citation Lawrence A. Cunningham, Capital Market Theory, Mandatory Disclosure, and Price Discovery, 51 Wash. & Lee L. Rev. 843 (1994), https://scholarlycommons.law.wlu.edu/wlulr/vol51/iss3/3 This Article is brought to you for free and open access by the Washington and Lee Law Review at Washington & Lee University School of Law Scholarly Commons. It has been accepted for inclusion in Washington and Lee Law Review by an authorized editor of Washington & Lee University School of Law Scholarly Commons. For more information, please contact [email protected]. Capital Market Theory, Mandatory Disclosure, and Price Discovery Lawrence A. Cunningham* L Introduction The once-venerable "efficient capital market hypothesis" (ECMH) crashed along with world capital markets in October 1987, but its resilience has nearly matched the resilience of those markets. Despite another market break in 1989, for example, the ECMH has continued to be reflexively heralded by numerous corporate and securities law scholars as an accurate account of public capital market behavior. Together with overwhelming evidence of excessive market volatility, however, these catastrophic market breaks revealed instinct infirmities m the ECMH that could hardly be shrugged off as mere anomalies. In response to the ECMH's eroding descriptive and prescriptive power, capital market theorists found in noise theory an auxiliary explanation for these otherwise inexplicable catastrophes.
    [Show full text]
  • Equities: Characteristics and Markets I. Reading. A. BKM Chapter 3
    Lecture 3 Foundations of Finance Lecture 3: Equities: Characteristics and Markets I. Reading. A. BKM Chapter 3: Sections 3.2-3.5 and 3.8 are the most closely related to the material covered here. II. Terminology. A. Bid Price: 1. Price at which an intermediary is ready to purchase the security. 2. Price received by a seller. B. Asked Price: 1. Price at which an intermediary is ready to sell the security. 2. Price paid by a buyer. C. Spread: 1. Difference between bid and asked prices. 2. Bid price is lower than the asked price. 3. Spread is the intermediary’s profit. Investor Price Intermediary Buy Asked Sell Sell Bid Buy 1 Lecture 3 Foundations of Finance III. Secondary Stock Markets in the U.S.. A. Exchanges. 1. National: a. NYSE: largest. b. AMEX. 2. Regional: several. 3. Some stocks trade both on the NYSE and on regional exchanges. 4. Most exchanges have listing requirements that a stock has to satisfy. 5. Only members of an exchange can trade on the exchange. 6. Exchange members execute trades for investors and receive commission. B. Over-the-Counter Market. 1. National Association of Securities Dealers-National Market System (NASD-NMS) a. the major over-the-counter market. b. utilizes an automated quotations system (NASDAQ) which computer-links dealers (market makers). c. dealers: (1) maintain an inventory of selected stocks; and, (2) stand ready to buy a certain number of shares of stock at their stated bid prices and ready to sell at their stated asked prices. (a) pre-Jan 21, 1997, up to 1000 shares.
    [Show full text]
  • Nasdaq Trader Manual
    Nasdaq Trader Manual Notice: This manual is in no way intended to be a substitution for, or relied upon in lieu of, the rules contained in the NASD Manual. The design and information contained in this manual are owned by The Nasdaq Stock Market, Inc. (Nasdaq), or one of its affiliates, the National Association of Securities Dealers, Inc. (NASD), NASD Regulation, Inc. (NASDR), Nasdaq International Ltd., or Nasdaq International Market Initiatives, Ltd. (NIMI). The information contained in the manual may be used and copied for internal business purposes only. All copies must bear this permission notice and the following copyright citation on the first page: “Copyright © 1998, The Nasdaq Stock Market, Inc. All rights reserved.” The information may not other- wise be used (not copied, performed, distributed, rented, sublicensed, altered, stored for subsequent use, or otherwise used in whole or in part, in any manner) without Nasdaq’s prior written consent except to the extent that such use constitutes “fair use” under the “Copyright Act” of 1976 (17 U.S.C. Section 107), as amended. In addition, the information may not be taken out of context or presented in a unfair, misleading or discriminating manner. THE INFORMATION CONTAINED HEREIN IS PROVIDED ONLY FOR THE PURPOSE OF PRO- VIDING GENERAL GUIDANCE AS TO THE APPLICATION OF PARTICULAR NASD RULES. ALL USERS, INCLUDING BUT NOT LIMITED TO, MEMBERS, ASSOCIATED PERSONS AND THEIR COUNSEL SHOULD CONSIDER THE NEED FOR FURTHER GUIDANCE AS TO THE APPLICATION OF NASD RULES TO THEIR OWN UNIQUE CIRCUMSTANCES. NO STATE- MENTS ARE INTENDED AS EXPRESS WARRANTIES. ALL INFORMATION CONTAINED HEREIN IS PROVIDED “AS IS” WITHOUT WARRANTY OF ANY KIND.
    [Show full text]
  • The Structure of the Securities Market–Past and Future, 41 Fordham L
    University of California, Hastings College of the Law UC Hastings Scholarship Repository Faculty Scholarship 1972 The trS ucture of the Securities Market–Past and Future William K.S. Wang UC Hastings College of the Law, [email protected] Thomas A. Russo Follow this and additional works at: http://repository.uchastings.edu/faculty_scholarship Part of the Securities Law Commons Recommended Citation William K.S. Wang and Thomas A. Russo, The Structure of the Securities Market–Past and Future, 41 Fordham L. Rev. 1 (1972). Available at: http://repository.uchastings.edu/faculty_scholarship/773 This Article is brought to you for free and open access by UC Hastings Scholarship Repository. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of UC Hastings Scholarship Repository. For more information, please contact [email protected]. Faculty Publications UC Hastings College of the Law Library Wang William Author: William K.S. Wang Source: Fordham Law Review Citation: 41 Fordham L. Rev. 1 (1972). Title: The Structure of the Securities Market — Past and Future Originally published in FORDHAM LAW REVIEW. This article is reprinted with permission from FORDHAM LAW REVIEW and Fordham University School of Law. THE STRUCTURE OF THE SECURITIES MARIET-PAST AND FUTURE THOMAS A. RUSSO AND WILLIAM K. S. WANG* I. INTRODUCTION ITHE securities industry today faces numerous changes that may dra- matically alter its methods of doing business. The traditional domi- nance of the New York Stock Exchange' has been challenged by new markets and new market systems, and to some extent by the determina- tion of Congress and the SEC to make the securities industry more effi- cient and more responsive to the needs of the general public.
    [Show full text]
  • Providing the Regulatory Framework for Fair, Efficient and Dynamic European Securities Markets
    ABOUT CEPS Founded in 1983, the Centre for European Policy Studies is an independent policy research institute dedicated to producing sound policy research leading to constructive solutions to the challenges fac- Competition, ing Europe today. Funding is obtained from membership fees, contributions from official institutions (European Commission, other international and multilateral institutions, and national bodies), foun- dation grants, project research, conferences fees and publication sales. GOALS •To achieve high standards of academic excellence and maintain unqualified independence. Fragmentation •To provide a forum for discussion among all stakeholders in the European policy process. •To build collaborative networks of researchers, policy-makers and business across the whole of Europe. •To disseminate our findings and views through a regular flow of publications and public events. ASSETS AND ACHIEVEMENTS • Complete independence to set its own priorities and freedom from any outside influence. and Transparency • Authoritative research by an international staff with a demonstrated capability to analyse policy ques- tions and anticipate trends well before they become topics of general public discussion. • Formation of seven different research networks, comprising some 140 research institutes from throughout Europe and beyond, to complement and consolidate our research expertise and to great- Providing the Regulatory Framework ly extend our reach in a wide range of areas from agricultural and security policy to climate change, justice and home affairs and economic analysis. • An extensive network of external collaborators, including some 35 senior associates with extensive working experience in EU affairs. for Fair, Efficient and Dynamic PROGRAMME STRUCTURE CEPS is a place where creative and authoritative specialists reflect and comment on the problems and European Securities Markets opportunities facing Europe today.
    [Show full text]
  • How Important Is Liquidity Risk for Sovereign Bond Risk Premia? Evidence from the London Stock Exchange by Ron Alquist
    Working Paper/Document de travail 2008-47 How Important Is Liquidity Risk for Sovereign Bond Risk Premia? Evidence from the London Stock Exchange by Ron Alquist www.bank-banque-canada.ca Bank of Canada Working Paper 2008-47 December 2008 How Important Is Liquidity Risk for Sovereign Bond Risk Premia? Evidence from the London Stock Exchange by Ron Alquist International Economic Analysis Department Bank of Canada Ottawa, Ontario, Canada K1A 0G9 [email protected] Bank of Canada working papers are theoretical or empirical works-in-progress on subjects in economics and finance. The views expressed in this paper are those of the author. No responsibility for them should be attributed to the Bank of Canada. ISSN 1701-9397 © 2008 Bank of Canada Acknowledgements I would like to thank my colleagues in the International Department at the Bank of Canada, seminar participants at the University of Saskatchewan, Laura Beny, Ben Chabot, Lutz Kilian, Linda Tesar, Marc Weidenmier, and Kathy Yuan for their comments. Brian DePratto, Maggie Jim, and Golbahar Kazemian provided first-rate research assistance. ii Abstract This paper uses the framework of arbitrage-pricing theory to study the relationship between liquidity risk and sovereign bond risk premia. The London Stock Exchange in the late 19th century is an ideal laboratory in which to test the proposition that liquidity risk affects the price of sovereign debt. This period was the last time that the debt of a heterogeneous set of countries was traded in a centralized location and that a sufficiently long time series of observable bond prices are available to conduct asset-pricing tests.
    [Show full text]
  • What Do Short Sellers Know?
    What do Short Sellers Know? December 2012 Ekkehart Boehmer EDHEC Business School Charles M. Jones Columbia Business School Xiaoyan Zhang Krannert School of Management, Purdue University Abstract Using proprietary short-sale order data, we investigate the sources of short sellers’ informational advantage. Heavier shorting occurs the week before negative earnings surprises, analyst downgrades, and downward revisions in analyst earnings forecasts. The biggest effects are associated with analyst downgrades. While these event days constitute only 12% of sample days, they account for 24% of the overall underperformance of heavily shorted stocks. The results indicate that short sellers are well-informed about upcoming earnings news and anticipate analyst recommendation changes. Shorting predictability remains significant after controlling for information in analyst actions, suggesting that short sellers know more than analysts about firm fundamentals. Keywords: short-selling, earnings news, analyst recommendations, analyst forecasts. We thank Paul Bennett at the NYSE for providing system order data. We thank Bruno Biais, Larry Glosten, Terry Hendershott, Albert Menkveld, Adam Reed, Fabrice Riva, Kumar Venkataraman, Isabel Figuerola-Ferretti, and seminar participants at the the 6th Annual Central Bank Workshop on the Microstructure of Financial Markets, Australian National University, EDHEC, Fordham University, the Madrid Finance Workshop, University of New South Wales, University of Sydney, the University of Technology, Sydney, Université Paris Dauphine’s Third Workshop on Financial Market Quality, University of Georgia, George Mason University, University of Hawaii, and the Western Finance Association for their comments and suggestions. EDHEC is one of the top five business schools in France. Its reputation is built on the high quality of its faculty and the privileged relationship with professionals that the school has cultivated since its establishment in 1906.
    [Show full text]
  • High-Frequency Trading – a Discussion of Relevant Issues Press Workshop
    High-frequency trading – a discussion of relevant issues Press Workshop London, 8 May 2013 High-frequency trading – a discussion of relevant issues May 2013 Agenda HFT – background • How do you define high-frequency trading (HFT)? • What are the most common HFT strategies? • Why is the speed so important? • What is the impact of HFT on market quality? HFT – issues • Do HFT users cause volatility? • Why are there critical voices on HFT from institutional investors? • How do HFT firms (re-)act in critical times? HFT – Regulation • How do regulators deal with HFTs? • What impact does the German HFT Bill have for HFTs? 2 High-frequency trading – a discussion of relevant issues May 2013 Differentiation of “algorithmic trading” (AT) and HFT Common factors of AT and HFT: • Pre-designed trading decisions • Used by professional traders • Observing market data in real-time • Automated order submission, automated order management • No human intervention • Use of direct market access Typical characteristics of AT excl. HFT Typical characteristics of HFT • Primary agent trading • Proprietary trading • Minimize market impact (for large orders) • High number of orders, rapid order cancellation • Significant positions overnight • Mainly spread and arbitrage income • Typical holding periods: days/weeks/months • No significant position at the end of a day (flat position) • Working an order through time and across markets • Short holding periods, small margin per trade • Low latency requirement • Focus on highly liquid instruments Source: Gomber et al. (2011) 3 High-frequency trading – a discussion of relevant issues May 2013 HFT is a technology applied to a broad spectrum of strategies A conclusive definition of HFT is difficult since it is the technology necessary for implementing a broad range of latency sensitive strategies.
    [Show full text]
  • A Historical Sociology of London's Smaller Company Markets
    The rise and fall of the penny-share offer: A historical sociology of London’s smaller company markets Dr Philip Roscoe School of Management The University of St Andrews The rise and fall of the penny-share offer: A historical sociology of London’s smaller company markets Dr Philip Roscoe School of Management The University of St Andrews page 1 Philip Roscoe ©Philip Roscoe School of Management The University of St Andrews The University of St Andrews is a charity registered in Scotland: No SC013532. page 2 Contents 1. Summary findings . 5 2. Introductory remarks . 8 3. Dog tracks and matched-bargains. 10 . 3.1. Gorgonzola Hall . 10 3.2. S Jenkins & Son. .15 . 3.3 Big Bang . 19 . 4. Regulation, technology, and the birth of OFEX. 23. 4.1 OTC, USM and Third Market. .23 . 4.2 Formalizing 535.2: J P Jenkins Ltd. 29. 4.3 The market’s ‘place’ . .35 . 5. Elite lobbying and the AIM? . .44 . 5.1. ‘Firestorm’ . 44. 5.2. Building a market . 52 5.3 Privatized regulation . 55 . 6. 1995 to 2000: Dotcom bubble and IPO boom . 62 6.1 The advisory ecosystem and raising funds on OFEX . .66 7. Bear market travails and the end of OFEX . 71 . 7.1. The decision to float on AIM . 74 7.2. The Jenkins family loses control. 79 . 8. From 2004 to 2010: Markets at war. 82 8.1. AIM’s change of direction. 83. 8.2. The new contender – PLUS Markets . 88 8.3. Project Tortoise. .95 . 8.4. Head to head with AIM.
    [Show full text]
  • Market Efficiency
    1 CHAPTER 6 MARKET EFFICIENCY – DEFINITION, TESTS AND EVIDENCE What is an efficient market? What does it imply for investment and valuation models? Clearly, market efficiency is a concept that is controversial and attracts strong views, pro and con, partly because of differences between individuals about what it really means, and partly because it is a core belief that in large part determines how an investor approaches investing. This chapter provides a simple definition of market efficiency, considers the implications of an efficient market for investors and summarizes some of the basic approaches that are used to test investment schemes, thereby proving or disproving market efficiency. It also provides a summary of the voluminous research on whether markets are efficient. Market Efficiency and Investment Valuation The question of whether markets are efficient, and if not, where the inefficiencies lie, is central to investment valuation. If markets are, in fact, efficient, the market price provides the best estimate of value, and the process of valuation becomes one of justifying the market price. If markets are not efficient, the market price may deviate from the true value, and the process of valuation is directed towards obtaining a reasonable estimate of this value. Those who do valuation well, then, will then be able to make 'higher' returns than other investors, because of their capacity to spot under and over valued firms. To make these higher returns, though, markets have to correct their mistakes – i.e. become efficient – over time. Whether these corrections occur over six months or five years can have a profound impact in which valuation approach an investor chooses to use and the time horizon that is needed for it to succeed.
    [Show full text]
  • Glued to the TV Distracted Noise Traders and Stock Market Liquidity
    Glued to the TV Distracted Noise Traders and Stock Market Liquidity JOEL PERESS and DANIEL SCHMIDT * ABSTRACT In this paper we study the impact of noise traders’ limited attention on financial markets. Specifically we exploit episodes of sensational news (exogenous to the market) that distract noise traders. We find that on “distraction days,” trading activity, liquidity, and volatility decrease, and prices reverse less among stocks owned predominantly by noise traders. These outcomes contrast sharply with those due to the inattention of informed speculators and market makers, and are consistent with noise traders mitigating adverse selection risk. We discuss the evolution of these outcomes over time and the role of technological changes. ________________ *Joel Peress is at INSEAD. Daniel Schmidt (Corresponding author) is at HEC Paris, 1 rue de la Liberation, 78350 Jouy-en-Josas, France. Email: [email protected]. We are grateful to David Strömberg for sharing detailed news pressure data, including headline information, and to Terry Odean for providing the discount brokerage data. We thank Thierry Foucault, Marcin Kacperczyk, Yigitcan Karabulut, Maria Kasch, Asaf Manela, Øyvind Norli, Paolo Pasquariello, Joshua Pollet (the AFA discussant), Jacob Sagi, Paolo Sodini, Avi Wohl, Bart Yueshen, and Roy Zuckerman for their valuable comments, as well as seminar/conference participants at the AFA, EFA, 7th Erasmus Liquidity Conference, ESSFM Gerzensee, 2015 European Conference on Household Finance, UC Berkeley, Coller School of Management (Tel Aviv University), Marshall School of Business, Frankfurt School of Management and Finance, Hebrew University, IDC Arison School of Business, Imperial College Business School, University of Lugano, University of Paris-Dauphine, and Warwick Business School.
    [Show full text]