Good Example Of Research Proposal On Does Technology Assist In Achieving Stock Market Efficiency?
Type of paper: Research Proposal
Topic: Investment, Stock Market, Technology, Market, Efficiency, Innovation, Time Management, Exchange
As capital markets continue to burgeon around the world, automation and technological improvements play a big role in proliferation of these markets as a conduit for economic growth. This paper thus investigates as if the technology is all good for the stock exchanges, or if it has some bad effects over the efficiency of the stock exchanges. Beginning the paper with a theoretical discussion and by introducing some real-life evidences both in favor as well as against the role of technology in the stock exchanges, the paper concludes with literature evidences where scholars by using different research methodology have postulated different views relating to the role of technology in promoting stock market efficiency.
The purpose of this research paper is to ascertain if the introduction of technology into the stock market process has improved the stock market efficiency. While there are no doubts that technology has increased the volume of stock trading significantly, and has done wonders for the companies and the investors. But, this research paper is aimed towards bringing an unbiased and a comprehensive conclusion to the research topic. In other words, rather than carrying out the research with a pre-conceived notion that technology did all good in promoting stock market efficiency, we will be peeping into the modern history to check instances, when technology did the worst for the stock exchanges.
However, before jumping into the main conclusion, we will be discussing as how the role of technology in the stock market process has changed over the years, instances where technology backfired and caused loses to the investors, which will be followed by a literature review where we will discussing the view of various researchers over this topic.
In the end, we will be performing research methodology where interviews and sample survey for the real time market trades will be conducted, while for the quantitative part, we will also be running regression analysis for the data sourced from various sources.
Role of technology in the stock market
Indisputably, stock markets have gained an impeccable importance for any nation. While the investors put their money in the worthwhile stocks, and then the borrowers put this money into the most productive avenues to provide return to their shareholders. The whole process and the whole gamut of money have turned so large, that without the involvement of technology, the stock market would have never achieved such a great heights. For instance, London Stock Exchange was deregulated in 1986, and the automated stock trading system was introduced during October, 1986 that proved a big bang for the financial market. Just before the automation of stock exchanges, the average number of daily trades in the exchange was 20000, that post the meteoritic impact of automation went up to 59000. Moreover, by the end of 1987, the exchange was trading was doing as much business in a month as it did during the whole 1986. Today, the average daily number of shares traded is 566,000, with a daily trade value of £16.6bn. Thus, post the introduction of technology in the financial markets, the world was ready to become the ‘’Tech-Puppets’ and from here the technology had gained its importance in financial markets.
Hence, we can credit technology for accommodating the increased transactions and volume of trade, that are generated both by the proliferation of end investors, and by electronic trading & algorithms, i.e. the byproducts of technology.
How technology brought carnage to the stock exchange?
In the previous section, we discussed how the technological advancements have changed the phase of financial markets and has largely benefited all the participants. But, technological transformation did come with a hitch, in fact, multiple times. Soon after the London Stock Exchange was automated, during 1987, the stock market crashed and the London Stock Exchange saw share prices plummeting, and lost 23% of its value in one single day. Eventually, investors lost billions of pounds, and it was blamed that trading in certain stocks could not be stopped, and it was partly a result of the immaturity of the new technologies introduced in the Big Bang. Even the market analyst confirmed that although technology was not the cause of the stock market crash of 1987, but it did assisted significantly to the velocity of the fall in the share prices.
In an another instance, on August 2nd, 2012, a computer programming mishap eroded $440 Million from Knight Capital portfolio in less than 30 minutes when its market-making software that was programmed to do 2400 trades in a minutes time, was accidentally buying high and selling low. By the end of the day, the company’s stock had lost 62% of its value. The whole mishap was termed as ‘’Mother of all computer glitches’’.
Most recently, on August 22nd, 2013, NASDAQ was another victim of technological glitch and trading was halted for three hours because of the so-disclosed, ‘’ Connectivity Issue’’ that degraded the ability of the Securities Information Processor (SIP) disseminate consolidated quotes and trades.
Thus, we have sufficient real-life evidences that proved that technology did promote the market efficiency, but at many instances, it has distorted or has assisted in distorting the market efficiency.
In this section, we will discuss the view of various researchers as if technology promoted the market efficiency. However, in order to provide comprehensiveness to this section, we have reviewed research papers focused on stock exchange of different countries.
William Leigh and Russells Pervis in their research paper, ‘’ Historical Impulse Response of Return Analysis’’, analyzed the effect of introduction of technology on Dow Jones Industrial Average and Transportation & Utility Average using the closing value of each of the industrial indices for past 67 years. The researchers found that after the introduction of technology in 1990, the Dow Jones Industrial Average Index did indicated improved market efficiency, as they found that the average return curves were consistent only until 1990. This proved that the technology did assist in the rapid diffusion of the information through the exchange. However, the results were opposite for the Transportation &Utility Index, and no such improvement were recorded in this lesser-known index. Thus, the researchers concluded that the technology did benefited only a well-known and high volume traded index, and not the one with low volumes.
Gene D’Avolio, Efi Gildor, and Andrei Shleifer, in their research paper, ‘’ Technology, Information Production, and Market Efficiency’’, concluded that the technological improvement is democratizing the US stock exchanges, and is largely responsible for quick diffusion of ownership along with reduced cost of trading. Hence, technology did improve the efficiency of the stock markets in the United States.
Philip Kofi Adom and Tei Menshah, ‘’Does technology improved stock market efficiency?’’ evaluated the role of technology in promoting the market efficiency in the Ghana Stock Exchange after the exchange was automated in 2008. The researcher used the daily market returns from GSE All-Share Index for the period 2006-2008 and 2008-2011, and investigated the impact of automation on the efficiency of the stock exchange under the framework of Weak-Form efficient market hypothesis by applying the highly dependable statistical models, Unit Root Random Walk Model and GARCH Model. Interestingly, the researchers found that the exchange continued to be inefficient even after the automation of the stock market, and technology could bring no benefit. This research paper has a special contribution as most of the research papers were focused on testing the role of technology in the stock markets of developed exchanges such as London Stock Exchange, Dow Jones et cetera. Hence, a literature review on a developing stock exchange such as Ghana can widen the scope of our research paper and also our need for big sample data to conduct the required research methodology.
Mehmet Dicle and John Levendis, in their research paper, ‘’‘’The impact of technological improvements on developing financial markets: The case of the Johannesburg Stock Exchange ‘’ analyzed the impact of automated stock trading system, SETS, on the efficiency of Johannesburg Stock Exchange, to which they found that post the introduction of SETS in 2002, the exchange did offered diversification benefit and improved liquidity. However, the researchers found that the returns were still predictable on the exchange, which by no means is an indication of efficient stock market. Thus, they concluded that introduction of technology into Johannesburg Stock Exchange could not promote market efficiency This paper is another contribution to counter the notion that everything is good between technology and market efficiency. Hence, now we can assert that the past literature review is of the opinion that the technology could only benefit the developed stock exchanges while the developing exchanges will still deal with inefficiency, and even introduction of technology could not do any good for them.
The final research paper which we reviewed, ‘’Has Stock Market Efficiency Improved in India?’’ is a work from Dr. PK Mishra. The paper did not test the technology at forefront and its role in improving the stock market efficiency, but was inclined towards checking if Bombay Stock Exchange (BSE) is efficient. For this purpose, the researcher used the variance ratio test for the closing prices of BSE and CNX Nifty indices for the period of March, 2009 to March, 2013 and then examined their random walk behavior under efficient market hypothesis. Interestingly, here also, the researcher concludes that even after 20 years of automation, the exchange could not achieve efficiency as returns were found to be predictable, and many opportunities for earning abnormal profits were available, which itself was a violation of stock market efficiency
In this section, we will introduce our research methodology to find out if ‘’Technology do improve stock market efficiency’’. For this purpose, we will be introducing qualitative section, under which we will be describing the results of a survey conducted on the investors and also the real-time market traders, and their opinion over the role of technology in improving the stock market efficiency was registered. The outline of survey questionnaire is as follows:
1. What age group you belong to?
2. What is the range of your yearly income?
3. What is the range of your disposable income?
4. Do you have any investment portfolio?
5. If yes, under which asset class you have made the maximum investments?
-Precious Metals (Gold, Silver, Platinum)
6. Do you pursue your asset allocation using electronic trading system?
7. Who decides your asset allocation?
- My portfolio manager.
- On my own.
- Following the advice of analyst and successful investors.
8. Have you ever faced loss because of disrupted technology services?
9. Do you agree that technology increases the efficiency of stock exchanging?
10. If yes, please share your personal views as why you feel like that? If not, how you feel that technology disrupts market efficiency? Please provide elaborative opinion.
11. Please suggest any technical improvement you desire to see on the stock exchanges?
12. Any references to conduct this survey on a wider scale?
Flinders, K. (2007, November 2). The evolution of stock market technology. Retrieved April 1, 2015, from http://www.computerweekly.com/news/2240083742/The-evolution-of-stock-market-technology
Gene D’Avolio, E. G. (n.d.). Technology, Information Production,and Market Efficiency.
Hunter, M. (2013, August 22). Nasdaq: 'Connectivity issue' led to three-hour shutdown. Retrieved April 1, 2015, from CNBC: http://www.cnbc.com/id/100968086
Justice Tei Mensah, M. P.-B. (n.d.). Does Automation Improve Stock Market Efficiency? Evidence from Ghana. Retrieved February 19, 2015, from http://www.academia.edu/2516185/Does_Automation_Improve_Stock_Market_Efficiency_Evidence_from_Ghana
Levendis, M. D. (2013). The impact of technological improvements on developing financial markets: The case of the Johannesburg Stock Exchange . Research Paper.
Mishra, P. (2013). HAS STOCK MARKET EFFICIENCY IMPROVED IN INDIA. Research Paper.
Pervis, W. L. (2007). Historical Impulse Response of Return Analysis . Research Paper.
Philips, M. (2012, August 2). Knight Shows How to Lose $440 Million in 30 Minutes. Retrieved April 1, 2015, from Bloomberg: http://www.bloomberg.com/bw/articles/2012-08-02/knight-shows-how-to-lose-440-million-in-30-minutes