Market quality : joint impact of political lifecycles, high frequency trading and market fragmentation.

Abstract

The dissertation studies the joint impact of political lifecycles, market fragmentation and HFT on market quality. Market quality is defined as comprising of market efficiency and integrity. Three distinct but inter-related studies are conducted using a unique JSE data set and hand collected political data. Using 2SLS and 3SLS structural equations the research examines effective spreads, market manipulation and HFT in the context of market pluralism, market fragmentation. The research finds a country that has a dominant political party, tends to lead to a deterioration in efficiency and integrity, conversely improved systemic risk. Co-location on the Johannesburg Stock Exchange ushered in a higher participation of HFT. Study of the impact on integrity reveals whilst there was a positive relationship with market integrity, there exists cross equation correlation between effective spreads and EOD used necessitating a 2SLS structural equation analysis to resolve the issue of cross equation correlation. Finally, using 3SLS the dissertation examines the joint impact of market fragmentation and HFT participation on the JSE market. Overall, the study reveals overwhelming positive effect on market quality; effective spreads and EOD decrease ex-post. Crucially, a unit increase in effective spread is associated with a 788 unit increase in the number of EOD incidences, whereas a unit increase in OTT, a proxy for HFT is associated with an approximately 10 unit increase in the number of EOD incidences. Trading in the lit market increases the number of EOD incidences by 1.86 whereas trading in the dark market decreases the number of EOD incidence by 1.87. Curiously, political pluralism exerts a greater effect and impact on both efficiency and integrity accounting for a greater increase in terms of instances of EOD greater than 788 and is evidenced by the negative and significant relationship between stock’s province (HQ), pluralism and market quality. The research extents the literature on market quality by providing a unified framework for resolving the cross-equation correlations between effective spreads and measures of market integrity when reviewing HFT market participation.