Noise and the trading mechanism: the case of SETS

Patricia L. Chelley-Steeley

Research output: Contribution to journalArticle

Abstract

On 20 October 1997 the London Stock Exchange introduced a new trading system called SETS. This system was to replace the dealer system SEAQ, which had been in operation since 1986. Using the iterative sum of squares test introduced by Inclan and Tiao (1994), we investigate whether there was a change in the unconditional variance of opening and closing returns, at the time SETS was introduced. We show that for the FTSE-100 stocks traded on SETS, on the days following its introduction, there was a widespread increase in the volatility of both opening and closing returns. However, no synchronous volatility changes were found to be associated with the FTSE-100 index or FTSE-250 stocks. We conclude therefore that the introduction of the SETS trading mechanism caused an increase in noise at the time the system was introduced.
Original languageEnglish
Pages (from-to)387-424
Number of pages38
JournalEuropean Financial Management
Volume11
Issue number3
DOIs
Publication statusPublished - Jun 2005

Bibliographical note

The definitive version is available at www.blackwell-synergy.com

Keywords

  • trading mechanism
  • noise
  • SETS
  • opening and closing returns

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