Abstract

In order to improve the liquidity of the warrant market, Taiwan Stock Exchange announced operation directions, requiring the issuer (securities firm) of the warrants to perform the market making obligations after 1st January, 2009, i.e., to provide liquidity for the warrants that it issues. The aim of the paper is to evaluate the issuers of the warrants. We explore the following three questions. First, we ask how the market quality of the warrants varies across issuers for our overall sample period between 1st July, 2008 and 31st December, 2009. Second, we compare the market quality of the warrants before and after 1st January, 2009 across issuers, i.e., to examine whether or not the market quality is improved due to the operation directions, and if so, to what extent this goes on across issuers. Third, we examine the performance of the market making across issuers after 1st January, 2009. Our samples consist of twenty securities firms, 8,300 warrants, and about 12,000,000 intraday transaction data. The findings show that the top five issuers with the best market quality for the overall sample period are Polaris, KGI, Yuanta, Capital, and President, respectively; the top five issuers with the biggest improvement in market quality due to the operation directions are Jihsun, IBT, Masterlink, President, and Mega, respectively; the top five issuers with the best market making performance after 1st January, 2009 are Polaris, IBT, Yuanta, President, KGI. In summary, the market making mechanism amazingly reduced the bid-ask spread of the warrant market by nearly two-thirds, increase the depth by three times, and thus save investors the transaction cost about 6.3 billions on average. The transaction cost of the top five issuers with highest bid-ask spread is 3.6 times as high as that of the top five issuers with lowest bid-ask spread. The depth of the top five issuers with highest depth is 6.5 times as high as that of the top five issuers with lowest depth.  

Keywords

market Qualitybid-ask Spreadwarrants