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The Impact of Trading Halts on the Australian Equities Market

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The Impact of Trading Halts on the Australian Equities Market The Impact of Trading Halts on the Australian Equities Market STEVEN LECCE (200312369) DR. REUBEN SEGARA ________ The University of Sydney Finance Honours Dissertation OCTOBER 2007 Submitted in fulfilment of the requirement for the award of Bachelor of Commerce (Honours) degree CERTIFICATE OF ORIGINALITY I hereby declare that this submission is my own work and to the best of my knowledge it contains no materials previously published or written by another person, nor material which to a substantial extent has been accepted for the award of any other degree or diploma at University of Sydney or at any other educational institution, except where due acknowledgement is made in the thesis. Any contribution made to the research by others, with whom I have worked at University of Sydney or elsewhere, is explicitly acknowledged in the thesis. I also declare that the intellectual content of this thesis is the product of my own work, except to the extent that assistance from others in the project's design and conception or in style, presentation and linguistic expression is acknowledged. (Signed) …………………..……… Steven Lecce RELEASE OF THESIS I Steven Lecce understand that if I am awarded an honours degree my thesis entitled: “The Impact of Trading Halts on the Australian Equities Market” will be held by the Discipline of Finance and be available after three months for use by academic staff or students in research or other academic purpose. I agree that the Chair of Discipline or the Honours Co-ordinator may allow perusal of a copy of the thesis to an individual for research or study. Signed........................................................................................ Date…........................ 2 ACKNOWLEDGEMENTS First and foremost, I would like to extend a special thanks to my supervisor, Dr Reuben Segara. His assistance, feedback and insightful comments throughout the year have been nothing short of exceptional and I greatly appreciate his efforts. His willingness to be available at any time when I needed some guidance has significantly enhanced the overall quality of this dissertation. He has also made the year far more enjoyable than I ever imagined. I would like to thank the Securities Industry Research Centre of Asia-Pacific (SIRCA) for providing the data set used in this study, with special thanks to Nathan Williams for his tireless work. Special thanks to; Professor Alex Frino for providing guidance in the initial stages of choosing a topic, Dr Andrew Lepone for his guidance throughout the year and George Li for providing data at the later stages of my thesis that was greatly needed. I would also like to thank, Angelo Aspris, James Cummings, Jennifer Kruk, Brad Wong, and Jeffrey Wong for their friendship and insightful comments along the process. I would also like to offer a warm thanks to my honours classmates from the past year; specifically Kiril Alampieski and Erin Cacciola. Their support and friendship has made the entire honours experience considerably more enjoyable. I extend sincere thanks to my family and close friends, whose persistent encouragement and confidence in me throughout the entire process was invaluable. Last but not least, I would like to thank my girlfriend Laura for putting up with me during the whole year, especially in the latter stages when I was never around. Without her support I would not have made it through the year. 3 TABLE OF CONTENTS ABSTRACT....................................................................................................................................................... 7 1. INTRODUCTION........................................................................................................................................8 2. INSTITUTIONAL DETAILS ................................................................................................................... 13 2.1. Types of Trading Halts..................................................................................................................... 13 2.1.1. Discretionary Trading Halts..................................................................................................... 13 2.1.2. Automatic Trading Halts........................................................................................................... 14 2.2. Trading Halt Rules on the ASX ........................................................................................................ 14 2.2.1. Chapter 16 of the ASX Market Rules......................................................................................... 15 2.2.2. Chapter 17 of the ASX Listing Rules......................................................................................... 15 2.3. Continuous Disclosure..................................................................................................................... 16 2.4. Trading Halt Rules on the ASX vs other markets............................................................................. 18 3. EMPIRICAL LITERATURE ................................................................................................................... 20 3.1. Trading Halts are Beneficial for the Market.................................................................................... 20 3.1.1. Evidence from the U.S............................................................................................................... 21 3.1.2. Evidence from Other Overseas Exchanges ............................................................................... 23 3.2. Trading Halts are NOT beneficial for the Market............................................................................ 26 3.2.1. Evidence from the U.S............................................................................................................... 26 3.2.2. Evidence from Other Overseas Exchanges ............................................................................... 29 3.3. Other Studies.................................................................................................................................... 32 3.4. Empirical Literature Summary......................................................................................................... 33 4. THEORY AND HYPOTHESIS DEVELOPMENT ................................................................................ 38 4.1. Liquidity Impacts.............................................................................................................................. 38 4.1.1. Trading Volume......................................................................................................................... 38 4.1.2. Bid-ask Spreads......................................................................................................................... 39 4.1.3. Order Depth .............................................................................................................................. 40 4.2. Volatility Impacts ............................................................................................................................. 41 4.3. Return Impacts ................................................................................................................................. 42 4.4. Impact of Halt duration, Market capitalisation and Announcement type ........................................ 43 4.5. Volatility and Order depth ............................................................................................................... 44 5. DATA AND METHOD.............................................................................................................................. 45 5.1. Data.................................................................................................................................................. 45 5.2. Research Method.............................................................................................................................. 46 5.2.1. Trading Halt Analysis ............................................................................................................... 47 5.2.2. Identification Procedure for Control stocks.............................................................................. 48 5.2.3. Intra-day Analysis of Trading Behaviour around Trading Halts.............................................. 50 4 5.3. Market Quality Variables used in the Analysis ................................................................................ 51 5.3.1. Liquidity Measures.................................................................................................................... 51 5.3.2. Volatility Measures ................................................................................................................... 52 5.3.3. Return Measures ....................................................................................................................... 53 5.4. Supplementary Analyses................................................................................................................... 53 5.4.1. Volatility and Order Depth ....................................................................................................... 53 5.4.2. Alternative Matching Procedure............................................................................................... 55 6. RESULTS ................................................................................................................................................... 56 6.1. Descriptive Statistics for Trading
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