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 language | English |
|---|---|
| Pages (from-to) | 1545-1568 |
| Number of pages | 24 |
| Journal | Journal of Futures Markets |
| Volume | 41 |
| Issue number | 10 |
| Early online date | 20 May 2021 |
| DOIs | |
| Publication status | Published - 31 Oct 2021 |
Funding
We are very grateful to the editor, an anonymous referee, and Robert M. Anderson for invaluable support, and to the Korea Exchange (KRX) for access to the dataset. We would also like to thank Ilchan Ahn, Hyung-Suk Choi, Sang-Ho Jung, Sung Chae La, Jaehyun Lee, and seminar participants at the 10th Conference of Asia-Pacific Association of Derivatives in Busan (2014) and the 9th Conference on Asia-Pacific Financial Markets in Seoul (2014) for helpful comments. This paper was previously circulated under the title ?Price Stabilization and Discovery under a Conditional Random-End Trading Mechanism.? All errors are the responsibility of the authors.
Keywords
- call auction
- option linked manipulation
- price discovery
- price stabilization
- random end trading mechanism