The impact of trading floor closure on market efficiency: Evidence from the Toronto Stock Exchange
نویسندگان
چکیده
We are the first to evaluate the impact of the trading floor closure on the corresponding efficiency of the stock price formation process on the Toronto Stock Exchange (TSX). Utilizing short-horizon return predictability as an inverse indicator of market efficiency, we demonstrate that while the switch to all electronic trading resulted in higher trading activity and lower trading costs, the information asymmetry among investors increased. The TSX trading floor closure resulted in a significant decrease in informational efficiency and it took over twenty minutes longer after floor closure for information to be incorporated into prices compared to the pre-closure period. In multivariate setting, we provide further evidence that changes in information asymmetry and increased losses to liquidity demanders due to adverse selection account for the largest variations in the deterioration of the aggregate level of informational efficiency. Our results suggest that the human element plays an important role in price discovery and electronic trading should complement, rather than replace, the exchange trading floor. JEL Codes: G10; G14
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