Market quality, market reforms and investor familiarity: Evidence from the Indian stock market

Abstract

The study looks at the impact of three major regulatory changes that happened on the historic day of 2. July 2001, when badla was banned, rolling settlement replaced accounting period settlement for major stocks and same day options were introduced on a selective list of stocks. Further, four months down the line, on 9. November 2001, the Securities Exchange Board of India (SEBI) introduced stock futures on Indian bourses. These dates are very significant for the microstructure of the Indian stock market as SEBI made a coordinated effort to eliminate the bad qualities of badla and accounting period settlement and restored the good qualities of badla. These multiple microstructural and exogenous changes on a single day provide a unique setting to examine their impact on market quality. The study finds that market quality did not improve with this set of changes until the introduction of stock futures, which retain the good qualities of badla.