ZBB 2016, 387

RWS Verlag Kommunikationsforum GmbH, Köln RWS Verlag Kommunikationsforum GmbH, Köln 2199-1715 Zeitschrift für Bankrecht und Bankwirtschaft ZBB 2016 AufsätzeRobert A. Schwartz*

A Challenge for Equity Markets on Both Sides of the Atlantic: Can Liquidity be Augmented, Volatility Better Controlled, and Price Discovery Sharpened?

After suggesting that optimizing equity market structure remains a work in progress (as it has for the past five decades), the paper focuses on liquidity provision – a critical determinant of market quality – and its associations with intraday volatility and price discovery. Controlling intraday volatility and sharpening price discovery is of critical importance, it is not a simple matter, and it depends on market structure. After considering each term separately, we call attention to the public goods property of price discovery, set forth the traditional suppliers of liquidity (market makers, high frequency traders, and limit order placers), and contrast continuous and call auction trading. As liquidity is widely thought to be insufficient in equity markets in the US and Europe, we stress that listed companies should provide supplemental liquidity for their own shares and, to this end, we address a proposal that formalizes a corporate involvement.

Table of Contents

  • I. Introduction
  • II. A Work in Progress
  • III. Volatility
    • 1. Short-Period vs. Long-Period Volatility
    • 2. Accentuated Intra-day Volatility
  • IV. Liquidity and Price Discovery
    • 1. Resiliency
    • 2. Price Discovery
    • 3. Price Discovery is a Public Good
  • V. Liquidity Supply
    • 1. An Ecological Balance
    • 2. An Equilibrium Size of the Bid-Ask Spread
    • 3. Market Failure
  • VI. Market Structure
    • 1. Call Auctions
    • 2. Price Equilibrium at a Market Call
  • VII. Additional Supplemental Liquidity Provision
    • 1. A Proposal to Further Augment Liquidity and Better Stabilize the Market
    • ZBB 2016, 388
    • 2. The Stabilizing Price Impact of a Corporate Order
    • 3. Cash Flow Implications
  • VIII. A Call for Corporate Participation
*
*)
Marvin M. Speiser Professor of Finance and University Distinguished Professor, Zicklin School of Business, Baruch College, CUNY.
I thank Wolfgang Bessler for his valuable inputs into the production of this paper. I am also grateful to Jian Hua and Steve Wunsch for their constructive comments.

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