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Price Discovery of Online and Offline Trading on Korea Exchange

  • Journal of Insurance and Finance
  • 2011, 22(4), pp.109-147
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

woobaiklee 1 김종오 1

1한국방송통신대학교

Accredited

ABSTRACT

This paper examines online and offline traders' contribution to price discovery using unique data covering 339 stocks listed on the Korea Stock Exchange during the sample period from 2002 through 2003. We investigate daily contribution of each channel to price discovery using the weighted price contribution(WPC) suggested by Barclay-Warner(1993). We find that contribution to price discovery by Home Trading System(HTS), which holds substantial share of trading, is very low and statistically insignificant. In contrast, offline traders who place orders through brokers, lead the price discovery by representing 104% of weighted price contribution. The contribution of offline traders to price discovery is still statistically significant even after controlling trading frequency and trading volume. In view of behavioral finance, these empirical results are consistent with Barclay-Odean(2002)’s findings that traders become less profitable and more active after switching from phone-based trading to online trading, which is explained by overconfidence – augmented by self-attribution bias and the illusions of knowledge and control. Offline trader’s contribution to price discovery also strongly exceeds online traders’ contribution in the estimation extended to weekly and monthly interval, confirming that offline traders have long-term informational advantage. Institutional investors and foreign investors are offline traders, but individual investors concentrate substantial portion of trading on HTS. Notably, institutional investors and foreign investors significantly outperform individual traders in offline trading. Offline traders lead contribution to price discovery in large-capital stocks. These findings demonstrate that order placement channel is differentiated by investor types and reflected in price discovery. In summary, our empirical findings suggest that Korea stock market is efficient in public online information.

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