Al-Suhaibani And Kryzanowski-An Exploratory Analysis Of The Order Book, And Order Flow And Execution On The Saudi Stock Market.pdf

Journal of Banking & Finance 24 (2000) 1323±1357

www.elsevier.com/locate/econbase

An exploratory analysis of the order book, and

order ¯ow and execution on the Saudi stock

market

Mohammad Al-Suhaibani

, Lawrence Kryzanowski

b, *

Department of Economics, Imam University, Riyadh, Saudi Arabia

Department of Finance, Faculty of Commerce, Concordia University,

1455 De Maisonneuve Blvd. West, Montreal, Que., Canada

Received 27 October 1998; accepted 22 June 1999

Abstract

The microstructure of the Saudi Stock Market (SSM) under the new computerized

trading system, ESIS, is described, and order and other generated data sets are used to

examine the patterns in the order book, the dynamics of order ¯ow, and the probability

of executing limit orders. Although the SSM has a distinct structure, its intraday pat-

terns are surprisingly similar to those found in other markets with dierent structures.

We ®nd that liquidity, as commonly measured by width and depth, is relatively low on

the SSM. However, liquidity is exceptionally high when measured by immediacy. Limit

orders that are priced reasonably, on average, have a short duration before being ex-

ecuted, and have a high probability of subsequent execution. Ó 2000 Elsevier Science

JEL classi®cation: G15

Keywords: Market microstructure; Limit order book; Intraday patterns; Order

execution

Corresponding author. Tel.: +1-514-848-2782; fax: +1-514-848-4500.

E-mail addresses: mohisuh@alumni.concordia.ca (M. Al-Suhaibani), lad®53@vax2.

concordia.ca (L. Kryzanowski).

PII: S 0 3 7 8 - 4266(99)00075-8

1324 M. Al-Suhaibani, L. Kryzanowski / Journal of Banking & Finance 24 (2000) 1323±1357

1. Introduction

Other studies that examine

order-driven markets provide new evidence on patterns in the order book,

order ¯ow, and the interaction between the order book and order ¯ow. 3

In this paper, we study the Saudi Stock Market (SSM) which uses a com-

puterized trading mechanism known as Electronic Securities Information

System (ESIS). The objective is to examine the behavior of market participants

in the SSM to understand better the eect of order placement on market li-

quidity, and to determine whether certain patterns identi®ed in earlier studies

can be generalized to other trading structures. Our paper has several unique

aspects. First, the SSM, which is described in detail in the next section, is a pure

order-driven market with no physical trading ¯oor, regulated brokers or

market makers, and it is closed to foreign portfolio investments. The market

also is dierentiated by a long mid-day break, partially hidden order book, and

a constant tick size. Second, the unique data set provided by the Saudi Arabian

Monetary Agency (SAMA) includes all orders for listed stocks submitted

during the period from 31 October 1996 to 14 January 1997. This order data set

allows for the construction of the complete limit order book for this order-

driven market. The data set includes information that allows for the identi®-

cation of market and limit orders, and what we called order packages. Third,

we believe that our study is the ®rst to examine the market microstructure of

the SSM. We provide evidence on several issues related to the interaction be-

tween the order book and order ¯ow, which adds to the existing empirical

literature on order-driven markets. Finally, our paper examines a number of

new issues associated with order-driven markets. The literature on market

microstructure often discusses liquidity measures such as width, depth, resil-

1 ; 2

U-shaped patterns refer to the heavy trading activity on ®nancial markets at the beginning and

at the end of the trading day, and the relatively light trading activity over the middle of the day

(Admati and P¯eiderer (1988)).

For the US markets, these include studies by Wood et al. (1985), Jain and Joh (1988), McInish

and Wood (1991, 1992), Brock and Kleidon (1992), Gerety and Mulherin (1992), Foster and

Viswanathan (1993) and Chan et al. (1995a,b). McInish and Wood (1990) report similar results for

the Toronto Stock Exchange and Lehmann and Modest (1994) ®nd U-shaped patterns in trading

for the Tokyo Stock Exchange.

A representative example is the empirical analysis by Biais et al. (1995) of the limit order book

and order ¯ow on the Paris Bourse. Niemeyer and Sand as (1995), Hedvall and Niemeyer (1996),

Niemeyer and Sand as (1996) and Hedvall et al. (1997) perform similar analyses for stock markets

in Stockholm and Helsinki.

The recent availability of order, quote, and transaction data from stock

markets around the world has stimulated research on intraday stock market

phenomena. Intraday patterns identi®ed in the data of US and other developed

countries include the persistent U-shaped patterns in returns, number of shares

traded, volumes, bid±ask spreads, and volatility.

M. Al-Suhaibani, L. Kryzanowski / Journal of Banking & Finance 24 (2000) 1323±1357 1325

iency, and immediacy that may have more relevance for market-order traders.

Our unique data set allows us to examine liquidity measures that are relevant

for limit order traders, the only suppliers of liquidity on the SSM. Using order

duration and logit regressions, we present new evidence on the probability of

executing a limit order on the SSM.

The remainder of this paper is structured as follows. Section 2 presents a

detailed description of the current trading system. The data sets are described

in Section 3. Sections 4 and 5 analyze the limit order book and order ¯ow,

respectively. Section 6 presents and analyzes the empirical ®ndings on limit

order execution. Section 7 concludes the paper.

2. Market description

The SSM is relatively new in age compared to the stock markets in the

developed countries. The ®rst company went public in Saudi Arabia in 1954.

By the end of 1982, 48 companies traded in the Saudi market, which was

completely unregulated by the government.

The new regulations transferred share trading, which oc-

curred in the over-the-counter market, from the hands of the unocial

brokers to the banks. Because of low volume and lack of coordination be-

tween the banks, a delay of several days or weeks often occurred before

orders were ®lled. Several other restrictions resulted in lengthy delays. Banks

could neither hold positions in stocks nor break up large blocks of shares to

accommodate buyers. 6

A major development in trading on the SSM post-market-regulation was the

establishment in 1990 of an electronic trading system known as ESIS.

After

the startup of ESIS, the banks established twelve Central Trading Units

(CTUs). All the CTUs are connected to the central system at SAMA. The bank

CTUs, and designated bank branches throughout the country that are con-

nected to the CTU (ESISNET branches), are the only locations where buy and

sell orders can be entered directly into ESIS.

Due to religious considerations, only stocks are traded in the market. From the viewpoint of

sharia (Islamic law), interest on bonds is regarded as usury.

More information on the Kuwaiti ®nancial crises, which is known as the ``Souq al-Manakh''

crisis, is found in Darwiche (1986).

In 1992, SAMA allowed the banks to manage open-ended mutual funds for public investors.

However, the banks are still not allowed to invest directly or indirectly, through the mutual funds,

in Saudi stocks.

More on the history of the SSM up to 1990 is found in Malaikah (1990), Wilson (1991), and

Butler and Malaikah (1992).

The collapse of the unregulated

stock market in Kuwait motivated the Saudi government to take regulatory

action in 1984.

1326 M. Al-Suhaibani, L. Kryzanowski / Journal of Banking & Finance 24 (2000) 1323±1357

Trading on the SSM consists of four hours per day, divided into two

daily sessions for Saturday through Wednesday. The trading day consists of

one two-hour session on Thursday. Table 1 summarizes trading hours and

trading days on the SSM. During the morning and evening hours no

trading occurs, but wasata can add and maintain order packages and orders

that were entered through their CTU or ESISNET branches. The wasata are

neither brokers nor dealers. They are order clerks whose assigned job is

merely to receive and verify orders from public traders at the CTU, and

then to enter these orders into the system. Conditional on SAMA approval,

the banks hire and pay the wasata. Sell and buy orders are generated from

the incoming sell and buy order packages. If an order package has many

®rm orders, each is dierentiated by parameters such as quantity, price and

validity period.

Orders are executed at an

equilibrium price calculated to be the best possible price for executing the

maximum number of shares available in the market at the open. This is fol-

lowed by a continuous auction market, where marketable orders by public in-

vestors are transacted with the limit orders of other public investors.

In the

post-trading period, trades are routed to settlement, trading statistics are

printed, and no order package or order can be added or maintained.

Only limit orders with a speci®ed price and ®rm quantity are permitted.

Firm orders are eligible for execution during the opening and continuous

trading periods according to price-then-time priority rules. An investor can

In ESIS terms, order packages are called orders, and orders are called quotes. These de®nitions

dier from those usually used in the literature. Order in the literature usually refers to order with a

®rm quote that leads instantly to a bid or ask if it is a limit order, or to a trade if it is a market

order. The ®rm quotes (as de®ned by the ESIS) are more like orders as usually de®ned in the

literature. In the market, generating a ®rm quote is the same as placing an order. To be consistent

with the literature, orders are referred to as order packages, and quotes are referred to as orders.

Before 28 May 1994, the validity period for an order package was either 1, 5 or 10 days.

Subsequently, the validity period became 1, 6 or 12 days. From 1 October 1994, the validity period

was allowed to be any period from 1 to 12 days.

In a call market, orders for a stock are batched over time and executed at a particular point in

A limit order is an order with speci®c quantity and price and for a given period of time. For a

limit buy (sell) order, the price is below (above) the current ask (bid). Marketable limit order is a

limit order with a limit price at or better than the prevailing counterparty quote. For a marketable

buy (sell) order, the price must equal or better the current ask (bid). Notice that the standard

market order (order to buy or sell a given quantity for immediate execution at the current market

price, without specifying it) is not accepted by the system. Since marketable and market orders are

essentially similar, we use the term market order when referring to marketable orders in the

remainder of the paper.

Order packages entered into the system may be valid for a

period from 1 to 12 days. 9

At some point of time during the ®rst ®ve-minute opening period, all ®rm

buy and sell orders participate in a call market.

time.

M. Al-Suhaibani, L. Kryzanowski / Journal of Banking & Finance 24 (2000) 1323±1357 1327

Table 1

Trading hours and trading days on the SSM a

Days

From Saturday to

Wednesday

Thursday

Time

From

Morning period b

8:15 AM

10:00 AM

8:15 AM

10:00 AM

The ®rst opening period

10:00 AM

10:05 AM

10:00 AM

10:05 AM

The ®rst continuous trading session c

10:05 AM

12:00 AM

10:05 AM

12:00 AM

The second opening period

4:25 PM

4:30 PM

None

The second continuous trading session c

4:30 PM

6:30 PM

None

Post-trading period

6:30 PM

7:00 PM

12:00 AM

12:30 PM

Evening period b

7:00 PM

8:00 PM

12:30 PM

1:30 PM

Source: SAMA, ESIS: Instructions to Central Trading Units.

No trading occurs during these periods. However, wasta can add and maintain order packages

and orders that were entered through their CTU or ESISNET branches.

The ®rst and second continuous trading periods are 115 and 120 minutes in elapsed time, re-

spectively. Thus, the second continuous trading period is 5 minutes longer than the ®rst continuous

trading period.

With each change, the order loses its time priority. When adjusted,

the order price must be within its order package quantity and price limit.

Aggressive sell (buy) orders can walk down (up) the limit order book.

When

an order is partially executed, any unexecuted balance is automatically placed

in a new order at the same price and with the same execution priority as the

original order. The order package can be executed fully or partially through

more than one transaction at dierent times, with dierent orders, and even

with dierent prices.

To reduce adverse selection problems, the system has some negotiation

capability beside the automatic routing and execution.

A transaction only

with large value (usually SR 1/2 million [US$133,333] or more) can be executed

All or part of an order package can be canceled by putting it ``on-hold'' or returning it back to

the market at any time. ``On-hold'' orders are out of the market but still in the system. As a result,

they have no price or time priority, and do not become automatically ®rm after executing all or part

of the outstanding ®rm quantity in the order package.

The limit order book (Ôthe order bookÕ) is the collection of all ®rm limit orders generated from

all order packages arrayed in descending prices for bids and in ascending prices for asks.

Adverse selection problems exist if some traders have superior information and cannot be

identi®ed. In such situations, the uninformed traders lose on average to informed traders. Without

uncertainty, the uninformed traders would trade with each other and not trade with the informed

traders.

adjust order prices and their quantities, or change a ®rm order to on-hold at

any time.

Plik z chomika:

Inne pliki z tego folderu:

Inne foldery tego chomika: