Two essays on equity market microstructure

This dissertation consists of two essays in the area of equity market microstructure using transaction level data. The first essay examines the event of closing cross in NASDAQ on April 2004. It investigates the choice of participating in closing cross, its impacts on intraday liquidity, volatility, and market quality. It is observed that large cap stocks favor closing cross more than other stocks and closing cross mitigates volatility and order imbalance in NASDAQ. Closing cross does not draw additional volume to either NASDAQ or ECNs; however, it helps NASDAQ to gain proportionally more volume from ECNs around market close. In addition, the gap in transaction costs between NASDAQ and ECNs narrows down after the introduction of closing cross, particularly for medium and large cap stocks. Only small cap stocks experience lowered intraday volatility. Moreover, there is evidence of market quality deterioration. The second essay unfolds the intraday impact of price limits on the magnet effect and the momentum effect. Using Korea Stock Exchange's high frequency trading data and limit order book, we confirm the presence of the magnet effect by demonstrating accelerated trading activities during the 30-minute period prior to limit hits. We introduce quasi limit hits in the Korea Stock Exchange and pseudo limit hits in NASDAQ to distinguish the magnet effect from intraday momentum effect. This paper concludes that the magnet effect is led by the existence of price limits; dictated by the width of price limit band; and is not confined to a particular group of stocks.