A Tale of Two Market Microstructures: Spillovers of Informed Trading and Liquidity for Cross Listed Chinese A and B Shares

Abstract

Using a novel multivariate microstructure model and time varying estimation framework we analyse the change in the information structure of the segmented Shanghai A and B share listed stocks after a significant set of regulatory reforms in 2001, nicknamed the 'year of regulation' by commentators. This provides an interesting natural experiment to determine whether a standard rational expectations model can capture the impact of these regulatory reforms on the information structure of this market. We find that whilst there is an increase in the number of informed traders after the B market was opened up to domestic traders the major reaction was a substantial spike then sudden a drop in the variance of uninformed traders order submissions in the B market post 2001. Simultaneously, the variance of the global noise surrounding the informed traders increases by around 5%. We suggest that our methodology and results will help inform regulators outside of the Chinese market when attempting to establish the impact of changes in trading restrictions.