Information technology is a linchpin to the operation of securities markets around the world. Fully computerized trading facilities are growing in importance in these markets, and automation of trading processes through information technology has radically changed the speed of securities trading. Several stock exchange floors, on which brokers manually matched orders using an open-cry system, have been replaced by or are being converted to electronic trading systems. In these markets, information technology is also being adopted to globalize trading and settlement activities, enabling investors to trade in different markets regardless of time and location. For market economies, this electronic linkage capability of information technology facilitates the daily flow of capital through markets, offering the potential of creating a thriving securities market (Levitt, 1989; Malone, Yates, & Benjamin, 1987). Amihud and Mendelson (1989) demonstrated in their study that market liquidity could be enhanced through the proper use of information technology. (Liquidity in securities market refers to the ability to quickly buy or sell a share without causing a significant movement in the price. Liquidity is one of the most important characteristics of a good market.)
Automation of capital markets has also been found to have instilled or enhanced transparency in market activities to an extent, with respect to price and trade information (Brailsford, Frino, Hodgson, & West, 1999; Grunbichler, Longstaff, & Schwartz, 1994; Hamilton, 1978; Jassawalla, 1989; Nabi, 2004; Picot, Bortenlaenger, Roehrl, 1995). Brailsford et al. (1999) found that the automation of the stock market resulted in an increase of around 77% in contemporaneous public information transfer. With the entire bid-and-ask schedule and course of sales available on an almost real-time basis, and directly to all market participants, investors do not have to rely on brokers for this information. On the part of brokers, they do not have to undertake a physical search for the appropriate party to fulfill a sell or buy order raised by their clients in these markets. A fully automated trading system matches sell and buy orders, regardless of size of stock portfolios, and is considerably faster than physical floor trading, which can result in lower transaction costs for participants in the market.
This paper looks at the adoption of information technology in the Chinese stock exchanges and for online securities trading in China. Because these stock exchanges do not have any major preexisting technology to consider when they automate their operations, they are able to adopt advanced technology. However, the potential and advantages offer by this technology cannot be fully harvested without fundamental structures and proper corporate governance mechanisms in place. IT plays a crucial role in market operations but a successful market infrastructure is a key resource.
Chinese Stock Markets
The first stock market was established in Shanghai in 1891 but was forced to shut down during the Japanese invasion in 1941. The Cultural Revolution and political disruptions kept this market shut until the end of the Mao era, at which point the new communist leader, Deng Xiaoping, opened its economy to trade. The stock market in China was revived with the re-establishment of the Shanghai Stock Exchange in December 1990. In July 1991, a second stock exchange, Shenzhen Stock Exchange, was opened for trading. Since the official re-establishment or opening of these exchanges, there has been an increase in stock market activities. Figure 1 shows the increases, on average, in market capitalization value, negotiable market capitalization value, and stock turnover in both Shanghai and Shenzhen Stock Exchanges between 1992 and 2003. A majority of the listed companies are state-owned companies, which issued three types of shares: state-owned shares, legal person shares (shares cross-held by companies), and tradeable shares (shares owned by individuals). …