Effectiveness of the conditional random-end trading mechanism on the Korea exchange: normal trade and option shock

Kyong S. Eom, Kyung Y. Kwon, Jong-Ho Park

Research output: Contribution to journalArticlepeer-review

Abstract

Option Shock was a notable 2010 manipulation in Korean stock and derivatives markets. Motivated by Option Shock, we examine the effectiveness of the conditional random-end (RE) trading mechanism during the opening or closing call auction on the Korea Exchange. We find the conditional RE trading mechanism promotes price stabilization, but with some reservations, and improves price discovery and efficiency at the open, but causes overshooting at the close. We also find it somewhat effective in filtering out spoofing orders, but failed to stabilize the market in the extreme case of Option Shock, which motivated a change to an unconditional RE trading mechanism.
Original languageEnglish
Number of pages24
JournalJournal of Futures Markets
Early online date20 May 2021
DOIs
Publication statusE-pub ahead of print - 20 May 2021

Keywords

  • call auction
  • option linked manipulation
  • price discovery
  • price stabilization
  • random end trading mechanism

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