Inventory‐based stock market transparency rules
| Published date | 01 January 1997 |
| Pages | 23-28 |
| DOI | https://doi.org/10.1108/eb024901 |
| Date | 01 January 1997 |
| Author | John Board,Charles Sutcliffe |
| Subject Matter | Accounting & finance |
Journal
of
Financial Regulation
and
Compliance
Volume
5
Number
1
Inventory-based stock market transparency rules
John Board* and Charles Sutcliffe
Received: 7th August, 1996
*London School of Economics, Houghton Street, London WC2A 2AE; tel: 0171 955 7314;
fax: 0171 955 7420.
John Board is Reader in Finance and Account-
ing at the London School of Economics and
Political Science.
Charles Sutcliffe is Professor of Finance and
Accounting at the University of Southampton,
and was previously the Northern Society Pro-
fessor of Accounting and Finance at the
Univer-
sity of Newcastle.
They have recently completed a study of the
current transparency regime Jointly commis-
sioned by the London Stock Exchange and
LIFFE as well as a number of other pieces of
research into the operation of the Stock
Exchange.
ABSTRACT
The London Stock Exchange is currently pre-
paring for the largest changes in its trading
practices since the Big Bang. It is already
known that the Exchange is proposing to
retain its
practice
of delaying the publication of
large trades so as to
encourage
the execution of
such trades, even though this delayed publica-
tion also creates an undesirable information
imbalance. However, in reality, what matters
to market makers is the effect of a large trade
on their inventory position, not the size of the
trade
itself.
It is shown that delaying trade
publication on the basis of size and inventory
delays the publication of far fewer trades than
does the current regime, while still offering
protection to market participants who provide
liquidity by unbalancing their inventory to
accommodate
large trades.
INTRODUCTION
One of the difficulties facing all stock
exchanges is achieving an appropriate balance
between the ability of investors to trade with-
out delay at a good price (immediacy), against
the general desire for openness in trading
(transparency). All the major stock exchanges
acknowledge that very large trades need to be
'worked' into the market. Without this, the
sale of, say, 500,000 shares might take some
time and depress the price unnecessarily. Some
markets, for example the New York Stock
Exchange, allow these 'block' trades to be pre-
arranged in an 'upstairs' market. However,
once arranged, the details of the trade are pub-
lished at once. These exchanges typically have
rules which ensure that investors not party to
the block trade do not suffer as a result.
Unlike most other stock exchanges, the
London Stock Exchange is currently organised
as a 'dealer' market in which designated firms
of market makers act as intermediaries
between buyers and sellers. Thus, an investor
might sell shares to a market maker, who then
holds the shares for a period, before selling
them on to the ultimate buyer. The chief obli-
gation of a market maker is to stand ready to
trade at advertised prices with all comers. Of
course, this obligation places the market maker
at risk from a substantial and adverse price
change during their period of ownership. To
protect them, and hence to induce them to
participate actively in the market, the London
Stock Exchange delays publication of the price
and volume of all large trades. The period of
delayed publication is designed to give the
market maker sufficient time to 'unwind' any
position in the stock. It also gives the market
Journal of Financial Regulation
and Compliance, Vol. 5, No. 1.
1997,
pp. 23-28
© Henry Stewart Publications,
1358-1988
Page
23
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