The Regional Stock Exchanges: Their Contributions to Market Liquidity and Economic Viability
Perry, Gladys Edna
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https://hdl.handle.net/2142/68373
Description
Title
The Regional Stock Exchanges: Their Contributions to Market Liquidity and Economic Viability
Author(s)
Perry, Gladys Edna
Issue Date
1981
Department of Study
Finance
Discipline
Finance
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Education, Finance
Language
eng
Abstract
Two conflicting opinions were noted in the literature regarding the future of the regional stock exchanges (RSE). One view purported that the RSE would cease to exist after May 1, 1975 when commissions became negotiable. This view was based on the fact that 80 to 95 percent of RSE volume was in NYSE and ASE listed securities. The fixed minimum commission schedule (FMCS) was believed the primary reason for the RSE activity. Therefore, the RSE were expected to cease to exist when the SEC mandated the withdrawal of the FMCS. The counter view supported the development of a central market system (CMS) in which the RSE were expected to be vital links within the system.
Key questions were: What services do the RSE perform in the seconday market? and What is their economic status? It was believed that the RSE provided added liquidity for stocks listed on the NYSE/ASE. A crucial question related to the belief that the RSE would be an important part of the CMS is their own economic efficiency and viability.
Micro and macro approaches were used to test the added liquidity premise. The micro approach examined forty-four NYSE/ASE listed securities added to a RSE between July 1974 and July 1977 using a comprehensive liquidity ratio. The data for six months prior to and twelve months after listing were indexed by listing month and normalized by market indexes. The data were examined on a pooled and individual security basis. The macro approach examined the monthly volume (value) of block trades (10,000 or more shares) on each stock exchange between January 1970 and December 1977. The market share of block volume (value) was calculated based upon total block trade and the individual stock exchange's trading volume. Trends analysis was applied to the total period and the sub-periods prior to and after May 1, 1975.
The sample liquidity results were mixed: there was increased liquidity for the NYSE securities dually listed on the RSE; "no effect" for NYSE securities granted unlisted trading privileges; "no effect" for ASE dually listed stocks; and a decline in liquidity for ASE securities granted unlisted trading privileges. The latter result was indicative of fragmentation effects while the "no effect" results were due to competition effects offset by fragmentation effects. Trend analysis of the block trades indicated that some of the RSE (Boston and Midwest) continued to grow after May 1, 1975.
To ascertain the economic strength of the RSE, economies of scale tests and financial ratio analyses were conducted. The economies of scale tests for the period 1955-1977 included: merger trends, relative market share trends; total cost relative to total value trades (cost elasticity model); and dollar trade per cost dollar. Ratio analysis included percentage income statements and selected balance sheet ratios from 1972-1976 to detect trends, as well as operational and management efficiency.
The economic viability issue affirmed that the securities industry was characterized by increasing returns to scale. Also, the cost structure makes the exchanges vulnerable to fluctuations in volume. The paper concluded that the RSE provide services desirable to a CMS but that the slow transition to a complete CMS was difficult for the RSE, especially Boston and Cincinnati. Unless Rule 390 is removed soon, it appears that the latter exchanges (based upon historical trends), may need to merge.
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