Effectiveness of the conditional random‐end trading mechanism on the Korea Exchange: Normal trade and Option Shock. Issue 10 (20th May 2021)

• Record Type: Journal Article
• Authors: Eom, Kyong S.; Kwon, Kyung Y.; Park, Jong‐Ho
• Is Part Of: Journal of futures markets. Volume 41:Issue 10(2021)
• Page Start: 1545
• Page End: 1568
• Publication Date: 2021-05-20
• Subjects: call auction -- option‐linked manipulation -- price discovery -- price stabilization -- random‐end trading mechanism; Commodity exchanges -- Periodicals; Foreign exchange futures -- Periodicals; 332.632
• DOI: 10.1002/fut.22223
• Languages: English
• ISSNs: 0270-7314

Abstract

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.