Abstract

This research examines the impact of continuous trading system versus fixing system on liquidity, volatility, pricing error and order flows. Our results show that the continuous system show better price determination than the fixing system. This result is surprising. Indeed, temporal consolidation and the absence of effect of noisy orders should have led to a reverse conclusion. We suggest that in thin market, insiders and large investors take advantage of small investors at the opening. These later are usually liquidity traders and therefore are more concerned about the execution of their transactions rather the transaction prices and thus bear higher trading costs. In opposite most of participants in the continuous period are strategic traders. Insiders and large investors take advantage of multilateral trading mechanism during the opening (fixing) period at the cost of small investors. Our analysis of the trading costs shows that trading in thin market encompasses high trading costs because of low market liquidity, low trading volume, high volatility, significant pricing error and low market capitalisation that are specific to these markets.

Key words: Market microstructure, market efficiency, volatility, emerging markets.