1992 Reports

Securities trading in the absence of dealers: Trades and quotes on the Tokyo Stock Exchange

Hamao, Yasushi; Hasbrouck, Joel

This paper investigates the behavior of intraday trades and quotes for individual stocks on the Tokyo Stock Exchange (TSE). The TSE has two distinctive institutional features: (1) the absence of market makers who trade for their own accounts, and (2) use of price limits. Our findings suggest that the immediacy available in the market is high, despite the reliance on public limit orders to supply liquidity. The price limit mechanism causes some trades to execute more slowly, but allows many incoming market orders to transact at more favorable prices. We furthermore examine the impact of trades on quotes. The TSE's mechanism is similar in many respects to the electronic limit order book modeled by Glosten (1991). Consistent with Glosten's prediction, we find some evidence for quote reversals subsequent to trades.