Essays on the microstructure of stock markets : empirical evidence from trading arrangements without dealer intermediation

Abstract

Understanding the competitive environment for securities trading is of great importance for Norges Bank’s overall responsibility for financial stability. As a manager of the Norwegian Government Petroleum Fund, the bank also has a more specific interest in the properties of different security trading arrangements.

A notable feature of today’s stock markets is the rapid development of electronic, orderdriven trading arrangements. In this thesis, Randi Næs provides empirical evidence on the properties of two such arrangements. Firstly, trading through crossing networks is analyzed based on transactions data from the Petroleum Fund. Crossing networks are shown to be cost effective alternatives to regular exchanges, however, crossing may also induce adverse selection costs not accounted for in traditional cost measures. Secondly, limit order trading is analyzed based on transactions data from the Oslo Stock Exchange. A main result is that the order book contains relevant information about contemporaneous trading volume and price volatility in the market.

This thesis is part of the author’s dr. oecon. exam at the Norwegian School of Economics and Business Administration, Department of Finance and Management Science. The thesis was defended on 2 September 2004, and Norges Bank is pleased to make this dissertation available to a wider audience by publishing it as Doctoral Dissertation in Economics No. 5.