Short-term traders and liquidity: a test using Bombay Stock Exchange data

The abolition and reinstatement of the forward trading facility (Badla) on the Bombay Stock Exchange is used to study the effect of short-term traders on share prices and liquidity, The reactions of stock prices to the ban reveal an average negative abnormal return of 15% on Badla stocks as compared to the non-Badla stocks. The ensuing period shows a significant decline in the liquidity of the Badla Stocks related to the announcement period CARs. Our results suggest that the market perceives short-term traders as playing a significant positive role, with a larger benefit accruing to the relatively less-liquid stocks. (C) 1998 Elsevier Science S.A. All rights reserved.