SURVEYING THE RELATIONSHIP BETWEEN STOCK MARKET MAKER AND LIQUIDITY IN TEHRAN STOCK EXCHANGE COMPANIES

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1 Inernaional Journal of Accouning Research Vol., No. 7, 4 SURVEYING THE RELATIONSHIP BETWEEN STOCK MARKET MAKER AND LIQUIDITY IN TEHRAN STOCK EXCHANGE COMPANIES Mohammad Ebrahimi Erdi, Dr. Azim Aslani, Dr. Mohammad Imani Barandagh Deparmen of Accouning, Science and research Branch, Islamic Azad Universiy, Ardabil, Iran Assisan Professor a Deparmen of Accouning in Urumiyeh Universiy, Wes Azerbaijan, Urumiyeh, Iran Absrac The main purpose of his sudy is surveying he relaionship beween sock marke maker and liquidiy. The populaion of his sudy are he companies ha acceped a Tehran sock exchange during he resen six years from 7 o. They were includes 5 companies in 37 indusry groups. To observe comparabiliy heir financial period was end of March. We have chosen daa from available company in Tehran Sock Exchange. To collecing daa wih considering companies siuaion, 98 companies were seleced as sample from 9 indusry groups. In order o analyze he daa resuled from colleced quesionnaires deducive and descripive saisical mehods are used. The resuls K-S Tes shows he es disribuion is Normal. So we can use Muli Regression (Chow Tes, Hausman Tes, Panel daa,..) o es he hypohesis of he research. In order o deermine he relaionship beween he variables of he sudyhe SPSS ool has been used. Findings show ha here is a coalificaion relaionship beween Sock marke maker and liquidiy in Tehran Sock Exchange acceped companies. Keywords: Sock marke maker, liquidiy, number of Sock raded, sock buyers coun, number of shares raded INTRODUCTION Empirical sudies linking liquidiy provision o asse prices follow naurally from invenory models. Liquidiy suppliers and marke markers profi from providing immediacy o less paien invesors, bu have limied invenory-carrying and risk-bearing capaciy. Similarly, limis o arbirage argumens rely on cerain marke paricipans accommodaing buying or selling pressure. These liquidiy suppliers/arbirageurs are willing o accommodae rades and, herefore, hold subopimal porfolios only if hey are able o buy (sell) a a discoun (premium) relaive o fuure prices. Thus, large liquidiy-supplier invenories should coincide wih large buying or selling pressure, which causes price movemens ha subsequenly reverse hemselves (Chordia e al, ). Mos foreign exchange rading firms are marke makers and so are many banks. The marke maker sells o and buys from is cliens and is compensaed by means of price differenials for he service of providing liquidiy, reducing ransacion coss and faciliaing rade. A marke maker or liquidiy provider is a company, or an individualha quoes boh a buy and a sell price in a financial insrumen or commodiy held in invenory, hoping o make a profi on he bidoffer spread, or urn (Radcliffe, 997: 34). In oher words; a marke maker is a firm, individual or rading sraegy ha always or ofen quoes boh a buy and a sell price for a financial insrumen or commodiy, hoping o make a 7

2 Inernaional Journal of Accouning Research Vol., No. 7, 4 profi by exploiing he difference beween he wo prices, known as he spread. Inuiively, a marke maker wishes o buy and sell equal volumes of he insrumen (or commodiy), and hus rarely or never accumulae a large ne posiion, and profi from he difference beween he selling and buying prices. Marke-making has been sudied exensively in he heoreical marke microsrucure lieraure (Glosen and Milgrom 985; Grossman and Miller, 988) for example], bu only recenly has he dynamic muli-period problem gained aenion (Darley e al, ; Das, 5). Since we are ineresed in he problem of how a marke-maker learns a value for an asse, we follow he general model of Glosen and Milgrom which absracs away from he problem of quaniies by resricing aenion o siuaions where he marke-maker places bid and ask quoes for one uni of he asse a each ime sep. Das (5) has exended his model o consider he markemaker s learning problem wih compeiive pricing, while Darley e al () have used similar modeling for simulaions of he NASDAQ. The Glosen and Milgrom model has become a sandard model in his area. Liquidiy, which is no easy o quanify, is he prime social concern. In pracice, i is a funcion of he deph of he limi order book. In our models, we measure liquidiy using he bid-ask spread, or alernaively he probabiliy ha a rade will occur. This gives a good indicaion of he level of informaional heerogeneiy in he marke, and of execuion coss. The dynamic behavior of he spread gives insigh ino he price discovery process. The main purpose of his sudy is surveying he relaionship beween sock marke maker and liquidiy. To achieve his purposes we find answer o his quesions:. Is here relaionship beween Sock marke maker and ransacion coun?. Is here relaionship beween Sock marke maker and sock buyers coun? 3. Is here relaionship beween Sock marke maker and number of shares raded? METHOD The populaion of his sudy are he companies ha acceped a Tehran sock exchange during he resen six years from 7 o. They were includes 5 companies in 37 indusry groups. To observe comparabiliy heir financial period was end of March. We have chosen daa from available company in Tehran Sock Exchange. To collecing daa wih considering companies siuaion, 98 companies were seleced as sample from 9 indusry groups. In order o analyze he daa resuled from colleced quesionnaires deducive and descripive saisical mehods are used. The resuls K-S Tes shows he es disribuion is Normal. So we can use Muli Regression (Chow Tes, Hausman Tes, Panel daa,..) o es he hypohesis of he research. In order o deermine he relaionship beween he variables of he sudyhe SPSS ool has been used. General analyical framework model is esimaed as follows. AFE i * Independen Variable H : i Model is no significan H : i Model is significan And he models used in his sudy is formulaed as follows: The firs model corresponds o he firs hypohesis: SLiq i * NTi MMi, BAi 3Ri 4Periodi 5diffi i, 8

3 Inernaional Journal of Accouning Research Vol., No. 7, 4 The second model corresponds o he second hypohesis: * NASi MMi, BAi 3Ri 4Periodi 5diffi i, The hird model corresponds o he hird hypohesis: * NSTi MMi, BAi 3Ri 4Periodi 5diffi i, RESULTS AND CONCLUSION - Descripive Resuls Table shows he Descripive Resuls of variables. Variable No. of Mean SD Observaion Liquidiy due o he number of Sock raded Liquidiy due o sock buyers coun Liquidiy due o he number of shares raded Sock Marke making Difference beween he proposed price and Sock Sysemic risk Sock rade boom period Balanced equilibrium price differences According o able he Liquidiy due o he number of Sock raded wih.4, Liquidiy due o sock buyers coun wih -.85, Liquidiy due o he number of shares raded.88 have mean. The highes mean has shown in liquidiy due o number of Sock raded and lowes mean has shown Liquidiy due o sock buyers coun. - Hypoheses resuls A) Hypohesis resuls The main purpose of firs hypohesis es was; here is a direc relaionship beween sock marke maker and ransacion coun. The saisical way of analysis his hypohesis is wo ways, H is accepance of hypohesis and H is rejecing of hypohesis. We have used he model () o esimae his hypohesis according o he panel daa and if he coefficien was significan a a confidence level of 95% will be approved. * NTi MMi, BAi 3Ri, 4Periodi 5diffi i, () To confirm he suiabiliy of panel daa mehod, we have used Chow Tes and o deermining fixed effecs or random effecs in order o beer esimae, we have used Hausman Tes. The resuls of hese ess are presened in. Table Chow Tes and Hausman Tes resuls Tes N Saisic Saisic df P-Value Chow 588 f Hausman According o Chow es resul P-Value in 95% confidence level is., and H has rejeced, i means ha we can be used panel daa mehod. Also, according o Hausman es resuls P-Value 9

4 Inernaional Journal of Accouning Research Vol., No. 7, 4 was less han.5 and acceped H.Therefore, i is necessary o esimae he model using fixed effecs. According o able 3 Jarque-Bera, Breusch-Pagan, Durbin-Wason and Ramsey es resuls show ha model's lineariy has confirmed and he model is no specified error. Table 3: Tes resuls concerning he saisical assumpions of he model () Ramsey Durbin- Breusch-Pagan Jarque-Bera Wason P Value F D P Value F P Value Table 4: The firs hypohesis resuls of he sudy wih using of fixed-effecs. Dependen variable: Liquidiy due o he number of Sock raded Variable Coefficien T-Tes P-Value Relaion Fixed componen Posiive Sock Marke making Posiive Difference beween he proposed price and Sock Meaningless Sysemic risk Negaive Sock rade boom period Negaive Balanced equilibrium price differences Negaive R =.865 F= p-value=. According o able 4 considering he significan whole modelhe p-value (.) was smaller han.5 and he model is confirmed. Deerminaion of coefficien model also indicae ha 86.5 percen of he liquidiy due o he number of Sock raded variable are debaed by he variables in he model. B) Hypohesis resuls The main purpose of second hypohesis es was; here is a direc relaionship beween Sock marke maker and sock buyers coun. The saisical way of analysis his hypohesis is wo ways, H is accepance of hypohesis and H is rejecing of hypohesis. We have used he model () o esimae his hypohesis according o he panel daa and if he coefficien was significan a a confidence level of 95% will be approved. * NASi MMi BAi 3Ri 4Periodi 5diffi i, () To confirm he suiabiliy of panel daa mehod, we have used Chow Tes and o deermining fixed effecs or random effecs in order o beer esimae, we have used Hausman Tes. The resuls of hese ess are presened in. Table 5 Chow Tes and Hausman Tes resuls Tes Saisic Saisic df P-Value Chow f Hausman According o Chow es resul P-Value in 95% confidence level is.9, and H has rejeced, i means ha we can be used panel daa mehod. Also, according o Hausman es resuls P-Value

5 Inernaional Journal of Accouning Research Vol., No. 7, 4 was less han.5 and acceped H.Therefore, i is necessary o esimae he model using fixed effecs. According o able 6 Jarque-Bera, Breusch-Pagan, Durbin-Wason and Ramsey es resuls show ha model's lineariy has confirmed and he model is no specified error. Table 6: Tes resuls concerning he saisical assumpions of he model () Ramsey Durbin- Breusch-Pagan Jarque-Bera Wason P Value F D P Value F P Value Table 7: The firs hypohesis resuls of he sudy wih using of fixed-effecs. Dependen variable: Liquidiy due o he sock buyers coun Variable Coefficien T-Tes P-Value Relaion Fixed componen Posiive Sock Marke making Posiive Difference beween he proposed price and..3.7 Sock Posiive Sysemic risk Meaningless Sock rade boom period Posiive Balanced equilibrium price differences Meaningless R =.873 F=7.44 P-value=. According o able 7 considering he significan whole modelhe p-value (.) was smaller han.5 and he model is confirmed. Deerminaion of coefficien model also indicae ha 87.3 percen of he liquidiy due o he sock buyers coun variable are debaed by he variables in he model. C) Hypohesis 3 resuls The main purpose of hird hypohesis es was; here is a direc relaionship beween sock marke maker and number of shares raded. The saisical way of analysis his hypohesis is wo ways, H is accepance of hypohesis and H is rejecing of hypohesis. We have used he model (3) o esimae his hypohesis according o he panel daa and if he coefficien was significan a a confidence level of 95% will be approved. The hird model corresponds o he hird hypohesis: * NSTi MMi, BAi 3Ri 4Periodi 5diffi i, (3) To confirm he suiabiliy of panel daa mehod, we have used Chow Tes and o deermining fixed effecs or random effecs in order o beer esimae, we have used Hausman Tes. The resuls of hese ess are presened in. Table 5 Chow Tes and Hausman Tes resuls Tes Saisic Saisic df P-Value Chow f Hausman According o Chow es resul P-Value in 95% confidence level is.4, and H has rejeced, i means ha we can be used panel daa mehod. Also, according o Hausman es resuls p-value

6 Inernaional Journal of Accouning Research Vol., No. 7, 4 was less han.5 and acceped H.Therefore, i is necessary o esimae he model using fixed effecs. According o able 6 Jarque-Bera, Breusch-Pagan, Durbin-Wason and Ramsey es resuls show ha model's lineariy has confirmed and he model is no specified error. Table 6: Tes resuls concerning he saisical assumpions of he model (3) Ramsey Durbin- Breusch-Pagan Jarque-Bera Wason P Value F D P Value F P Value Table 7: The firs hypohesis resuls of he sudy wih using of fixed-effecs. Dependen variable: Liquidiy due o he number of shares raded Variable Coefficien T-Tes P-Value Relaion Fixed componen Negaive Sock Marke making Posiive Difference beween he proposed price and Sock Meaningless Sysemic risk Posiive Sock rade boom period Negaive Balanced equilibrium price differences Negaive R =.788 F=7.73 P-value=. According o able 7 considering he significan whole modelhe p-value (.) was smaller han.5 and he model is confirmed. Deerminaion of coefficien model also indicae ha 78.3 percen of he liquidiy due o he number of shares raded variable are debaed by he variables in he model. Findings show ha here is a coalificaion relaionship beween Sock marke maker and liquidiy in Tehran Sock Exchange acceped companies. Oher resuls are: - There is relaionship beween Sock marke maker and ransacion coun in Tehran Sock Exchange acceped companies. - There is relaionship beween Sock marke maker and sock buyers coun in Tehran Sock Exchange acceped companies. - There is relaionship beween Sock marke maker and number of shares raded in Tehran Sock Exchange acceped companies. Reference. Chakrabory T., Kearns M., (). Marke Making and Mean Reversion, EC, June 5 9,, San Jose, California, USA. Chordia, T., Richard R., and Avanidhar S. (). Order Imbalance, Liquidiy, and Marke Reurns. Journal of Financial economics, 65(): 3 3. Darley, A. Oukin, T. Plae, and F. Gao. ().Sixeenhs or pennies? Observaions from a simulaion of he NASDAQ sock marke. InIEEE/IAFE/INFORMS Conf. on Comp. Inel. For Fin. Engr. 4. Das S., (5). A learning marke-maker in he Glosen-Milgrom model. Quan. Fin., 5(): Glosen.R. and Milgrom Bid P.R.,(985). ask and ransacion prices in a specialis marke wih heeroge-neously informed raders. J. Fin. Econ., 4:7

7 Inernaional Journal of Accouning Research Vol., No. 7, 4 6. Grossman S.J. and Miller M.H, (988). Liquidiy and marke srucure. J. Fin., 43: Radcliffe, Rober C. (997). Invesmen: Conceps, Analysis, Sraegy. Addison-Wesley Educaional Publishers, Inc. p