Evaluating market supervision through an overview of trading halts in the Portuguese stock market
| Published date | 01 December 2003 |
| DOI | https://doi.org/10.1108/13581980310810624 |
| Pages | 349-376 |
| Date | 01 December 2003 |
| Author | João Duque,Ana Rita Fazenda |
| Subject Matter | Accounting & finance |
Evaluating market supervision through an
overview of trading halts in the Portuguese
stock market
Joa
˜o Duque* and Ana Rita Fazenda**
Received: 26th September, 2003
*Universidade Te
´cnica de Lisboa, Instituto Superior de Economia e Gesta
˜o, Rua Miguel Lupi, 20,
1249-078 Lisboa, Portugal; tel: +351 21 392 5800; fax: +351 21 392 2808;
e-mail: jduque@iseg.utl.pt
**Comissa
˜o do Mercado de Valores Mobilia
´rios, Av. Fontes Pereira de Melo, 21, 1056-801
Lisboa, Portugal
Joa
˜o Duque has a first degree in busi-
ness administration from ISEG/Universi-
dade Te
´cnica de Lisboa and completed his
PhD at the Manchester Business School,
Manchester University, UK. He subse-
quently joined ISEG, Lisbon, Portugal
where he is a full professor of finance. He
teaches financial derivatives and portfolio
management. Until 1998 he was the head
of the Research Department at the Portu-
guese securities regulator, the Comissa
˜o
do Mercado de Valores Mobilia
´rios
(CMVM). His research interests lie in
financial markets, financial derivatives and
portfolio management. He has recently
published on subjects such as volatility
estimators, implied volatility, volatility
smiles and warrants.
Ana Rita Fazenda has a first degree in
economics from ISEG/Universidade Te
´c-
nica de Lisboa and completed her Masters
in monetary and financial economics at
the same university. She started her pro-
fessional career as a junior researcher in
the department of research and analysis
of FINCOR, a securities dealer in Lisbon.
In 2001 she moved to CNVM where she
has worked as a researcher in the
Research Department developing analysis
related to capital markets participants.
She will soon join Mercer Human
Resource Consulting as an Investment
Consultant.
ABSTRACT
KEYWORDS: market supervision, capital
markets, trading halts, stock price returns,
volatility, GARCH models.
This study concerns how well stock market reg-
ulators prevent trading by using trading halts
when they suspect asymmetric information in
the market. Security trading halts in the Portu-
guese stock market are analysed to measure the
effectiveness of trading halts imposed by market
authorities as well as their timing in interrupt-
ing and restarting trading.
Stock price returns, abnormal returns and
volatility are used to compare the significance of
differences for pre- and post-halt periods. First
the global sample is used to analyse abnormal
returns and then it is split into good and bad
news halts. A GARCH (1,1) model is also
applied and found to be a more sensitive instru-
ment on justifying trading halts.
Justification for trading halts tends to rise as
event window size increases, suggesting that
supervisory authorities tend to spot the domi-
nant changes better. In fact, when very short
Page 349
Journal of Financial Regulation and Compliance Volume 11 Number 4
Journal of Financial Regulation
and Compliance, Vol. 11, No. 4,
2003, pp. 349–376
#Henry Stewart Publications,
1358–1988
time-sampling periods are used weaker justifica-
tions for stock halting are found. The opportu-
nity for market authorities to interrupt trading
seems to be increasing. In terms of timing they
seem, on the whole, to be delayed when impos-
ing trading halts or anticipated when authoris-
ing the restart. Nevertheless, when considering
good news, although the halt tends to be late
the restart seems to be on time.
It is concluded that all methodologies should
be jointly applied by stock watch departments of
supervision authorities for detecting trading
under asymmetric information, but special atten-
tion is drawn to GARCH methodologies that
show superior ability for detecting changes in
stock characteristics.
INTRODUCTION
Market efficiency is a vital topic in orga-
nised and well-established capital markets.
This is the only way to keep investment
flow and economic activity in open econo-
mies based on strong capital markets. In
these markets information becomes the
most important resource in the creation of
expectations that lead to price formation.
This turns the regulator’s activity, particu-
larly its supervisory capacity, into one of
its most important roles. Financial litera-
ture has been quite interested in analysing
and testing the market efficiency of inves-
tors and financial intermediaries, but this
has scarcely been applied to regulators.
One of the major concerns of regulators
is preventing crime related to market infor-
mation. In this category of crime may be
included lack of information, false,
dubious, unclear, incomplete and/or con-
fusing information, and the transmission of
information out of the appropriate context.
All these factors may lead to information
asymmetry. Market regulators also look
for information exaggeration or for inves-
tors’ fictitious trading that may lead to the
formation of expectations on prices or
volumes that are false. In preventing the
spread of such symptoms that may lead to
unfair trading, supervisory authorities tend
to suspend trading in individual securities
during a certain period of time, during
which information has to be released in
order to overcome the noticed bias (trading
halts). With this mechanism, the main pur-
pose of the authorities is to give investors a
chance to react to new information and to
help the formation of a consensus price.
Regulatory and institutional details
Until 1991 the financial supervision of the
incipient Portuguese stock market was run
by a government body working under the
administration of the Portuguese Ministry
of Finance. In 1991 a new Finance Act and
a new and independent regulatory body
was created — Comissa
˜o do Mercado de
Valores Mobilia
´rios (CMVM). Twelve years
after its creation some attention should
focus on how its role has been developed;
analysing trading halts could be a start.
According to the law that regulated the
Portuguese capital market from 1991, the
regulator (CMVM) could impose trading
halts on any security on its own initiative,
by suggestion of the exchange or even by
proposal of any quoted company when it
concerns their own stocks.
1
Within the
mechanism that was established in the Act,
however, both the stock exchange and the
regulator shared the power to suspend
trading on stocks listed on the Market with
Official Quotations (blue chip stocks).
(Although, for the purpose of the law, a
distinction may be made, this paper will
not distinguish between trading suspension
and trading interruption.) For many years
the information concerning halts would be
unclear about their origins, ie who took
the initiative that led to the decreed inter-
ruption on trading. Therefore, trading halt
analysis could be significantly inaccurate if
used to make inferences about the regula-
tor’s efficiency in terms of its supervisory
activity. Even so, the analysis of trading
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Evaluating market supervision
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