Trading rules in stock exchange competition

In a recent TILEC discussion paper TILEC member Sofia Johan and co-author Douglas J. Cumming (York University) examine stock exchange trading rules for market manipulation, insider trading and broker agency conduct across countries and over time for 42 stock exchanges around the world. Some stock exchanges have extremely detailed rules which explicitly prohibit specific manipulative practices, while others use less precise and broadly framed rules. The authors investigate whether those rules influence investors' decision to trade on a specific exchange. To this end, the paper examines whether differences in trading velocity across exchanges are attributable to differences in rules. A hypothesis is tested that vague regulations create inefficiency as investors and/or traders are not clear as to which activities are acceptable and which ones are in breach of the spirit of the rules. Conversely, one may argue that detailed regulations create inefficiency as investors and/or traders are able to take advantage of inevitable loopholes. The data show a strongly positive and robust effect of trading rules on trading velocity, suggesting that trading rules are an important information source to consider for explaining differences in trading activity among stock exchanges around the world.