Trading Mechanisms and Market Quality: Call Markets versus Continuous Auction Markets*
SWeiyu Kuo(Department of International Business, National Chengchi University)
Yu-Ching Li(Department of International Business, National Chengchi University)

On July 29, 2002, the trading mechanism in the Taiwan Futures Exchange (TAIFEX) was switched from an exclusive call market to a continuous auction market. Based upon several proxies of market quality, in the present study, we set out to empirically examine whether this switch has resulted in any significant improvement in market quality within the TAIFEX. We find that while the quoted spreads, effective spreads, and price volatility are all smaller in the continuous auction market, the call auction market exhibits greater market depth and smaller pricing errors; the latter is also found to be more effective in resolving the problem of information asymmetry. Overall, the results of the present study suggest that the choice between call and continuous auction trading mechanisms essentially involves trade-offs between the bid-ask spread, market depth, price volatility, information asymmetry costs, and price efficiency.

*Kuo acknowledges financial support from the National Science Council of Taiwan (Grant number: NSC-93-2416-H-004-039). We would like to thank Shinn-Juh Lin, Michael Lemmon, and in particular, an anonymous referee for the helpful and thorough comments and suggestions.

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Global Volatility and Forex Returns in East Asia*
yan Garvey(Department of Finance, Duquesne University)
Fei Wu(School of Finance, Jiangxi University of Finance and Economics)

We examine the determinants of US equity trader choice of electronic versus intermediated execution. While traders exhibit a strong overall preference for automation, when the market is less liquid at order submission time, traders seek market maker automated and human order-matching services more often. Traders’ overall tendency to choose intermediaries is highly correlated with their demand for liquidity. Market maker participation rates are higher for more active and larger size traders. Traders who choose intermediaries more often trade more stocks, execute orders quicker, price orders more aggressively, and disperse their trading over longer periods of time. Although US stock intermediaries continue to lose market share, our results highlight the important role these firms can play in an increasingly automated, electronically driven marketplace.

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Stock Price Informativeness and Corporate Governance: An International Study*
Jing Yu(Department of Accounting and Finance, University of Western Australia)

This study investigates the cross-country relationship between firm-level corporate governance and stock price informativeness. Using firm-level data from 22 developed countries, we find that stock price informativeness, as measured by firm-specific stock return variation and future earnings response coefficients, increases with the quality of a firm’s corporate governance. Further analyses show that all mechanisms except board-related governance relate positively to stock price informativeness. Finally, firm-level corporate governance plays a more significant role in strengthening the stock return-earnings associations for firms in countries with strong institutional environments. This evidence highlights the role of country-level legal investor protections in shaping the relationship between firm-level corporate governance and stock price informativeness.

*I would like to thank Sudipto Dasgupta (the editor), the anonymous referee(s), Philip Brown, Sie Ting Lau, Lilian Ng, Bohui Zhang, and other seminar participants at the Nanyang Technological University, the University of Western Australia, and the 2008 annual meeting of the FMA for their helpful comments. I gratefully acknowledge the financial support by the Nanyang Business School and the UWA Business School.

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Decomposing the Income Insurance Channel across OECD and Emerging Markets
Faruk Balli(Department of Business Administration, Suleyman Sah University)
Hatice Ozer Balli(Department of Economics, Suleyman Sah University)
Rosmy Jean Louis(Department of Economics and Finance, Faculty of Management, Vancouver Island University)

This paper investigates the underlying forces driving income insurance channels for the Organisation for Economic Co-operation and Development (OECD) and emerging markets. We find income insurance channels across countries to be driven by different subchannels. For the OECD, income insurance is mostly governed by payments for financial liabilities; for the emerging markets, income flows from nationals working abroad constitute the main income smoother. Despite the growth in cross-border financial asset trading over the years, we could not find evidence of income smoothing via foreign assets receipts for the OECD. For the majority of emerging markets, neither receipts of foreign assets nor foreign liability payments are strong enough to insure income as well.

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A Creative Institutional Response to Twin Problems of Liquidity and Information Gaps in Certain Emerging Markets
Hammad Siddiqi(Department of Economics, Lahore University of Management Sciences)

We show that market makers in emerging markets of India and Pakistan developed a creative institutional response to solve the twin problems of liquidity and information gaps. These ‘institutional entrepreneurs’ developed a peculiar carryover transaction facility. A case can be made for finding other creative market responses in emerging markets that typically face similar problems.

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