The impact of microstructure innovations in emerging stock makets: evidence from Mumbai, India

We examine the impact on the Mumbai Stock Exchange of the introduction of screen-based trading (the “BOLT”) on 14 March 1995. We use event study methods to investigate if this reform had positive value using two samples of more liquid and less liquid stocks. We find that the impact was substantial: the average CAR for the more liquid A shares was about 4.5%, while that for the less liquid B shares was around 10%. We examine how far this improvement was associated with improvements in liquidity, efficiency and (reduced) volatility (LEV). We find evidence of increased liquidity and efficiency but more ambiguous results for volatility. A regression approach provides evidence that cross-sectional variations in the CARs can be explained by cross-sectional variations in firm-specific LEV improvements. Overall, the results suggest that the introduction of the BOLT improved the market microstructure for both A and B shares, with the effect on B shares being more marked.