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Effectiveness of the conditional random‐end trading mechanism on the Korea Exchange: Normal trade and Option Shock
Author(s) -
Eom Kyong S.,
Kwon Kyung Y.,
Park JongHo
Publication year - 2021
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.22223
Subject(s) - price discovery , shock (circulatory) , closing (real estate) , mechanism (biology) , financial economics , economics , econometrics , monetary economics , futures contract , finance , medicine , philosophy , epistemology
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.