Effect of day trading mechanism on market quality

This paper sets up an artificial stock market using the parameters of Chinese stock markets. It includes both call and continuous auction systems, and bounded-rational heterogeneous traders with modified three-factor model of mixed trading strategies and trading desire adjustment model. Through simulations under three market status, the effect of day trading rule on market quality was studied by both statistical and quantitative analysis. The result shows that under current Chinese stock market and traders' microstructure, day trading causes liquidity enhancement at the expense of volatility increment; permitting day trading in stable market improves liquidity at unit volatility and market efficiency, which improves market quality significantly; while in growing or recessionary market, plenty of irrational day trading behaviors exacerbate fluctuation and information efficiency, which reduces market quality. Thus, the paper suggests that rational trading behaviors should be induced before re-permitting day trading.