Introduction of the Budapest Liquidity Measure.
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Today's capital markets are characterized by concentration and sharper competition for issuers, trading participants, and liquidity. All trading platforms wish to accommodate the needs of market players, for ultimate efficiency and limitless flexibility. This enhances significantly the importance of measures that assist objective comparison of exchanges and markets. To serve this goal, the authors have created the Budapest Liquidity Measure (BLM), an indicator to show the main parameter of market efficiency: liquidity. The liquidity of a market determines the implicit cost of transactions; higher liquidity implies lower transaction costs. The paper introduces the structure and methodology of the BLM and compares it with other published liquidity measure models. The authors have been measuring liquidity since October 2004 on their domestic market (7 stocks and a future contract for the BUX index), on the London Stock Exchange (GDRs for four Hungarian stocks), and on the Warsaw Stock Exchange (two dual-listed Hungarian stocks), based on public Reuters order-book data. Thereby, the securities' primary and secondary listings become comparable, which may help institutional investors to select the most efficient market for order execution. The BLM expresses the implicit costs of transactions in basis points. It may also give valuable information for issuers on the effectiveness and on the added value of their secondary listings. The empirical findings prove that implicit transaction costs in the instruments concerned are much lower in Budapest than on the secondary-listing markets, as the authors demonstrate in the paper using various calculation examples. The author's methodology has been employed by the Budapest Stock Exchange to calculate the Budapest Liquidity Measure..
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