Information Technology is primarily shifting the landscape of the international financial markets by shrinking the world and reducing the magnitude of geographical location of markets thus, levelling the interacting field for investors and issuers. It has helped the stock market in being more dynamic and productive. This has eventually increased the number of investment products accessible to international investors as well as reduced transaction costs and asymmetric information. This paper aims at studying the extremely imperative aspect of this IT revolution and its impact on the efficiency of the Indian stock market. Thereby, the relationship between information technology and the stock market efficiency will be studied by taking the representative indices of the Bombay Stock Exchange i.e. BSE SENSEX. This will be done by covering the period before the introduction of automated technology and after. The conclusions have been drawn and explained.
INTRODUCTION
"As the economic theory says that more the participants that exist in a market, the more efficient that market is likely to be "
The Economy is undergoing a unique transformation, which has been driven by a technological revolution in the 1990's, and into the new millennium. In that technical revolution, innovations in computer processing, software telecommunications and the evolution of the Internet have come together to create the information economy. Communication between companies and their partner, suppliers, distributors, and consumers has changed information technology drastically. It is true that in modern times like today, the stock exchange market cannot function effectively without the use of information technology. Information technology has helped the stock exchange market in being more dynamic and productive. People and companies can make investments in stocks with the click of a mouse. Companies can see the exact position of their stocks in a very short time with the help of IT. In the stock exchange itself, everything is computer recorded.
Technology soars in the realms of the Stock Market. More than half of the world's population is on-line, and more and more people sign on every day. It is completely changing the workplace atmosphere of the investors. More and more businesses are logging on and creating their own web pages. It allows the smaller companies to be able to compete with the bigger bulls. Information technology based companies have a high market value. Some reasons for the higher market values are the expanded reach of the consumers and competitors. The consumers have a great access to more companies that offer the same product or service. This allows consumers to find the best product at the best price, and to deal with whatever company they want, big or small. In turn smaller competitors can gain higher market values through the Internet because they and their products or services become more accessible to the consumers that are searching for better and cheaper products. This allows them to have a much larger span. The Internet makes them accessible in the global market. Being more accessible will give them the opportunity to pick up a bigger market share, and give them a greater market value. Ultimately, it will give them the ability to compete with the larger corporations. Information technology thus enhances investor growth. The Internet has created global availability of information. "The global society is grounded in an information economy. Our economy centers around the production, distribution, organization, and utilization of information and knowledge." (Drucker, 1993; Bell, 1996)
New technology brings unique challenges and opportunities. Given below in a summarised version are the various impacts and results of the infusion of today's technology with the stock market functioning. The positive aspects of the information technology age for investors:
Advances in telecommunications and information processing offer financial institutions the capability in handling vast amount of data at very high speed and at relatively low costs.
Technology has shrunk the world and reduced the importance of geographical location of markets. This serves as a catalyst for exchanges to abandon open outcry and adopt screen-based trading technology.
Exchanges are fostering alliances with overseas counterparts in an effort to reduce high development costs in technology and to increase market share.
Technology has levelled the playing field for all investors around the world. Smaller investors are gaining access to real-time market information and low-cost trading and risk management systems which have until recent years been largely accessible by financial institutions.
Methodological breakthroughs in the pricing of sophisticated derivatives products have led to the invention and marketing of new financial instruments and trading strategies in repackaging risk and return profile.
The information technology world has had other huge impacts on the stock market in many other ways as well:
Information technology enhances investor growth,
Information technology lessens the role of the personal investment.
The negative aspects of the information technology that have an impact on the investors are:
Twisted details are possible with such a overabundance of information. Investors looking for information may find the wrong information or information that has been cooked, distorted or warped in the corporations' favour.
The more information there is out there, the harder it is to find the information you need because you have to trudge through all the excessive information. So with ease and inexpensive access brings unsophisticated investors.
Safety is another big question in the estimate. The system should be made secure from hackers trying to break in and damage orders or generate orders that were bogus.
Temporary service breakdowns that have hit leading online brokerages, have raised concerns about protection of online investors.
The Internet allows individuals to easily disseminate information to the investing public. It may enable irresponsible individuals to spread false information or hype to the investing public for their own benefits.
Online trading will inevitably involve cross-border transactions. This highlights the need to globalise supervision in order to avoid the risk of inconsistent regulation.
Ranawat, Raman 2012 explain that in the major stock markets of the world , it is the forces of demand and supply that sets prices. There are hundreds of analysts and thousands of traders, receiving new information on a company through electronic and public media. The Efficient Market Hypothesis implies that a if a new information is revealed about a firm it will be incorporated into the share price rapidly and rationally, with respect to the direction of the share price movement and the size of the movement.
The Internet trading phenomenon is still very much at its infancy crowded with technical difficulties such as online reliability, performance and security. It is hard to predict with high accuracy the development of online market in the coming years. However, it is believed that the Internet technologies will have significant impacts on a number of areas such as:
The traditional role of brokers on trade execution will diminish.
Technology creates a level playing field for investors, issuers and broker/deals.
The role of traditional exchanges will be undermined.
New challenges for investor protection.
Regulatory issues become global issues.
D'Avolio, Gildor and Shleifer 2001 explain that the recent advances in information and communications technology have improved the state of securities markets in two, and possibly three, out of these four dimensions. First, technology allows information to be disseminated to a broad base of investors in real time and at low cost, thus expanding the universe of investors with access to information. Second, technology is also reducing the barriers to entry for providing financial services and the resulting competition is driving down transaction costs. In addition to facing lower commissions; institutional and retail investors, aggressively pursued by competing intermediaries, they now enjoy unprecedented ease of trade execution. These changes are expanding market participation and facilitating dramatic increases in trading volume. Third comes the fact that the technology is indirectly improving the quality of investors' legal rights. New technology is rapidly democratizing securities markets. Yet the trends associated with the very technological progress that has democratized securities markets are also increasing the benefit of distorting information. These trends include the listing of companies at an early, cash constrained stage in the operating life cycle. For these companies, their stock is a currency they rationally seek to inflate. Even mature companies are increasingly granting stock options - a strategy that raises the benefits of a high current stock price. At the same time, information technology has rapidly widened market participation. The marginal investor may be becoming less sophisticated and experienced, and hence more likely to be taken by misleading information.
In an effort to stay ahead of the pack amid growing competition, established online brokers will continue to add more services to their web sites such as research, real-time share price quotes and portfolio management in order to extend their product portfolios. The core functions of an exchange are to bring together buyers and sellers, provide a mechanism for price discovery and central clearing, and provide a regulatory environment in which trading can take place. The Internet can already substitute the first two, linking buyers and sellers and enabling price discovery via browsing or search engines. Online services will stimulate interest from local investors to invest in overseas securities in search of higher returns and for portfolio diversification. Local markets will suffer as a result of losing volume to foreign markets through the Internet. Small brokers are especially vulnerable because of their lack of resources to develop their own internet capability. A concerted effort by the government, brokers and exchanges is required to bring out a solution to this prevailing issue which threatens to get worse as time goes by.
Electronic trading and remote access will attract investors to do business in any exchanges with the largest pool of liquidity. Exchanges are battling over price, efficiency and liquidity in an effort to become the portal in their own time zones of the global trading network. The battle between the DTB and the LIFFE for the position as the premier futures exchange in Europe is a clear example. In Asia, SIMEX has been aggressively launching a series of regional equity index contracts, in a bid to maintain its position as the leading centre for trading offshore Asian derivatives products. SIMEX first launched a NIKKEI 225 futures contract back in 1986 and followed by MSCI Taiwan stock index futures and option in 1997 and the Dow Jones Thailand stock index futures in November 1998. The domestic Singapore equity market remained essentially out of reach for foreign investors until SIMEX launched the MSCI Singapore stock index futures in September 1998. More significantly, SIMEX re-launched a Hong Kong stock index futures contract in November 1998 in direct competition with the HKI7E's flagship Hang Seng products. SIMEX's contracts are based on the MSCI Hong Kong+ Index (HiMSCI+), which has a 99.995% correlation with the Hang Seng Index.
REVIEW OF LITERATURE
Malkiel 1989 is of the view that a stock market is said to be efficient if it accurately reflects all relevant information in determining security prices. Although the evidence is not unambiguous, reports of the death of the efficient market hypothesis appear premature. One has to be impressed with the substantial volume of evidence suggesting that stock prices display a remarkable degree of efficiency. Information contained in past prices is included in current market prices, and any publicly available fundamental information is rapidly assimilated into market prices. Prices adjust so well to reflect all important information that a randomly selected and passively managed portfolio of stocks performs as well or better than those selected by the experts. Pricing irregularities may well exist and even persist for periods of time, and markets can at times be influenced by fads and fashions. Eventually, however, any excesses in market valuations will be corrected. He is of the opinion that undoubtedly, with the passage of time and with the increasing sophistication of our databases and empirical techniques, we will document further departures from efficiency and understand their causes more fully.
Marisetty 1999 was of the opinion that a stock exchanges' efficiency can be measured by its liquidity and price discovery. An exchange that provides price discovery will have high liquidity. By measuring the speed of stock price adjustment to its intrinsic value with the arrival of new information we can understand price discovery process and productive efficiency of a stock exchange. He found that it takes around nineteen days for the prices of a sample of stocks representing BSE and NSE exchanges, to adjust to their intrinsic values during 1996-2002.. The data was obtained from three different sources namely, PROWESS, DATA STREAM and NSE website. Multiple sources had been used for the validation purposes. The data included daily prices of stocks included in two major indices namely, BSE SENSEX and NSE NIFTY to represent BSE and NSE markets. The study period ranged from January 1996 to August 2002. The results had many implications for both researchers and practitioners. First, the price adjustment process in Indian stock markets is very slow. Second, Price overreaction indicates inefficiencies in the information dissemination process in Indian stock markets. Due to the unavailability of firm-specific information uninformed investors exhibit herd behaviour resulting potential losses with an eventual price reversals. Third, an index portfolio eliminates the price effects caused due to firm-specific factors. This indicates an index portfolio is a safer bet for risk-averse uninformed investors. Fourth, his research indicates that the even portfolios are prone to overreactions. Future research on the effect of index funds activity on the stock prices might help to understand the inconsistencies between BSE and NSE indices price discovery processes. Finally, he concluded that it is important for a stock market to have a design that allows price discovery. However, it is the traders, companies and regulators who really make the transformation occur.
D'Avolio, Gildor and Shleifer 2001 state that a well functioning securities market relies on the availability of accurate information, a broad base of investors who can process this information, legal protection of these investors' rights, and a liquid secondary market unencumbered by excessive transaction costs or constraints. When these conditions are satisfied, securities markets are likely to be broader and more efficient, with felicitous consequences for investment and resource allocation. His paper explores the effect of technological advances on these features of the market, emphasizing the incentives facing the producers of financial information. All four of these above mentioned requirements are important. Without the availability of accurate information, investors are unable to price securities, and might avoid securities markets altogether and simply invest in cash. Indeed, the available empirical evidence indicates that the quality of financial information, as measured by accounting standards, is an important determinant of stock market development. Finally, it is becoming increasingly clear that investors value cheap trading and liquidity, and that their willingness to hold securities greatly expands as secondary trading opportunities improve.
Leigh and Purvis 2009 compare average impulse response of rate of return curves computed from more than sixty-seven years of historical Dow Jones Industrial, Transportation, and Utility Average closing values. He found out that the curves are relatively consistent in shape until the 1990s, when marked changes, indicative of improved market efficiency, occur for the Dow Jones Industrial Average. They argue that the effect is a result of the increased availability and reduced cost of online stock trading and of the more rapid dissemination and diffusion of information made possible by information technology. The basis for their argument was that firstly, the effect occurs only for the Industrial Average, which is comprised of stocks which are most well known to the investing public, and not for the Transportation or Utility Averages, which are comprised of less well-known stocks; and secondly the effect is progressive and contemporaneous with the growth of the use of personal computing and the internet . The results in their paper are from the use of a method for deriving an empirical impulse response function of return, such as is discussed in Koop et al (1996). The method is applied to rolling 5000 trading day intervals of closing values of three Dow Jones Averages (Industrial -- DJIA, Transportation -- DJTA, and Utility -- DJUA) for the period 5/28/1936 to 1/26/2004, which comprises 17,000 trading days. The stock market acts like an elastic medium in time which transmits shock waves, in this case for rate of return shocks.
Roztocki, Weistroffe 2009 emphasised that much current research is dedicated to the impact of IT on global competiveness and development, particularly in emerging and developing countries (Roztocki & Weistroffer, 2008b). In addition to the more traditional approaches to investigate IT productivity, such as case studies, surveys, and research databases, event studies are also increasingly being used (Roztocki & Weistroffer, 2008a; Roztocki & Weistroffer, 2009). According to the efficient market theory (Fama, 1970; Fama, 1991), which provides the foundation for the event studies methodology, all available information to investors is reflected in the stock prices. When unanticipated news reach the financial markets, investors assess their relevance and potential effects on particular firms, industries, and economic regions. Stock prices of a company will move up when the news are perceived to be favourable; and bad news, i.e. news indicating the possibility of diminishing future cash flows for a company, will result in decreasing stock prices. In the event studies approach, the reaction of stock markets to reported events is used to explore the perceived relevance and implications of these events (McWilliams & Siegel, 1997).
Modis 2011 research work can be summarised by understanding that before 1998, the stock exchange generally consisted of people making deals and trading stocks on the floors. In today's stock exchange environment, almost everything is handled through the use of computers. For example, one estimate from all the way back in 1999 showed 90% of the trades made at the NYSE was done electronically. Even when people are making the deals themselves, they use smart phones and portable computers to communicate with offices in order to make sound decisions. In 2009, high-frequency trading had become the rage. According to The New York Times, very powerful computers began allowing high-frequency traders to send million of orders at unparalleled stock exchange speeds. Typical computers can't compete with the speed, and humans don't even stand a chance. He believed that as the information technology advanced, the stock exchange infrastructure would grow more sophisticated and most likely would become more automated. The stock buying and selling process evolves along with developments in computer technology and usability, so it's fairly certain that the stock market will continue to expand and reshape.
Gupta and Yang 2011 state that the market efficiency hypothesis is an important notion for investors who wish to hold internationally diversified portfolios. If markets were not efficient task of constructing an internationally diversified portfolio for an investor will be an arduous task. With the increased movement of investments into emerging markets, greater importance is being given to the understanding of the market efficiency in emerging markets. In this paper they test the weak form efficiency or random walk hypothesis for the two major equity markets (BSE and NSE) in India for the period 1997 to 2011. Results of market efficiency were mixed as: for quarterly data, all three methods ADF, PP and KPSS tests support the weak form efficiency for later sample period 2007 to 2011, but slight conflict for earlier period 1997 to 2007 as only PP test shows weak form inefficiency; for monthly data, all three test method were consistent on the weak form efficiency for the period 2007 to 2011 and not efficient for earlier period 1997-2007. For daily and weekly data, all three test methods rejected weak form efficiency during all sample periods.
Rotthoff 2011 state that the stock exchanges around the world have integrated a hybrid trading system. This has added anonymity for traders, making it harder for market makers to match large continuous trades, leading to an increase in volatility and a decrease in informational efficiency. This occurs because less information is contained in the price of a stock at any given time. As anonymity increases and market makers cannot effectively match buyers and sellers, volatility increases. Under the hybrid system or quasi-hybrid system, increased anonymity, similar to the increase in speed, decreases the amount of information in the price at any point in time.
Nisar and Hanif 2012 in their study have examined the weak form of efficient market hypothesis on the four major stock exchanges of South Asia including, India, Pakistan, Bangladesh and Sri Lanka. Historical index values on a monthly, weekly and daily basis for a period of 14 Years (1997-2011) were used for analysis. They applied four statistical tests including runs test, serial correlation, unit root and variance ratio test. Findings suggest that none of the four major stock markets of south-Asia follows Random-walk and hence all these markets are not the weak form of efficient market. To their knowledge there's was the first ever study being conducted which covered the leading South Asian markets, hence an evidence on market efficiency of that region was being contributed in literature. Their study was conducted in an empirical format by using secondary data gathered from KSE, BSE, DSE and CSE, on a monthly, weekly and daily basis for a period of July 01, 1997 to June 30, 2011. The daily, weekly and monthly closing index values were used to calculate the daily, weekly and monthly returns.
RESEARCH METHODOLGY
The BSE SENSEX, also called the BSE 30 or simply the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange. The 30 component companies which are some of the largest and most actively traded stocks are representative of various industrial sectors of the Indian economy. Published since January 1, 1986, the SENSEX is regarded as the pulse of the domestic stock markets in India.
The data has been taken from ACE EQUITY database. EViews software has been used for applying the various analytical tests. The data for this study has been from 1st January 1992 to 20th June 2012. For the purpose of the study the data has been divided into two parts; i.e. the Pre BSE On-Line Trading (BOLT) Period from 1st January 1992 to 31st December 1998 to the Post BSE On-Line Trading (BOLT) Period from 1st January 1999 to 20th June 2012. The BSE On-Line Trading (BOLT) system was introduced on 14th March 1995. But in actual the BSE On-Line Trading (BOLT) system expanded nation-wide in the year 1997. So 1997 is considered the implementation year of Automated Trading System. The year 1998 is taken as the closing year for the Pre BSE On-Line Trading (BOLT) because the time taken to adjust to the change was kept under consideration.
FINDINGS AND CONCLUSION
To begin with, the stationary of the return series was checked through visual means by line graphs, scatter plots and correlogram. All these three visual depictions showed that the returns were stationary. However, in order to have a better and more analytically correct picture of the series; the data was examined by the Unit Root Test, under which the Augmented Dicky-fuller Test was applied to check whether the data series was stationary. The result showed that the Null Hypothesis was rejected and this eventually led to acceptance of the Alternate Hypothesis which says that the returns are stationary.
Method
Statistic
Prob.**
ADF - Fisher Chi-square
1053.56
0.0000
ADF - Choi Z-stat
-32.0000
0.0000
Secondly, Regression Equations were applied to both the time periods separately to understand whether the returns were strongly or negatively correlated with each other. Thereafter, for total time period under study, i.e. from 1st January 1992 to 20th June 2012, the value of the Durbin-Watson Statistics came as 1.987070. This shows that the returns are strongly and positively correlated with each other.
Thirdly, in order to check the impact of information technology on the efficiency of the Indian stock market, the data had been divided into two parts; i.e. the Pre BSE On-Line Trading (BOLT) Period from 1st January 1992 to 31st December 1998 to the Post BSE On-Line Trading (BOLT) Period from 1st January 1999 to 20th June 2012. So the pre BOLT period data was examined and ARMA STRUCTURE technique was applied on it. The resultant correlogram which was obtained is as follows:
Similarly, the post BOLT period was examined and analysed using ARMA STRUCTURE command and the resultant correlogram derived was as follows:
So ultimately by studying the nature and direction of these correlogram's and comparing them analytically, the conclusion can be derived that:
The returns displayed by the BSE SENSEX in the period prior to the introduction of the automated trading system were more consistent and smooth as compared to those which were shown in the post automated trading era..
This indicated that the volatility in the post BOLT period was very high and acute as compared to the earlier phase.
Due to the availability and easier access of new innovative products, tools and avenues the consumers in the later years became more effervescent in their purchases and selling's. This eventually led the players of stock market to function in an environment of immense competition and propelled them to face the dramatic struggle to stay ahead of their rivals which sometimes resulted in hap-hazard decisions as well.
Lastly, as economic theory says that the more participants that exist in a market, the more efficient that market is likely to be. So as the smaller investors gaining access to real-time market information, low-cost trading strategies and better risk management systems, it has resulted in them being on the same platform that of the larger firms thus, increasing their market participation and overall investor growth statistics.
In an effort to stay ahead of the pack amid growing competition, established online brokers will continue to add more services to their web sites such as research, real-time share price quotes and portfolio management in order to extend their product portfolios. The adoption of new technologies has been the greatest paradigm shift affecting the stock market since the widespread adoption of the telephone. Increased productivity has allowed businesses to increase profitability and efficiency which has led to increased market valuations. Employees are able to work from many more places around the globe. Technology has also decreased the cost of participating in the stock market. Also with computers automatically matching buyers and sellers, the expense of a broker is no longer needed.
