Review of Quantitative Finance and Accounting, 19: 335–349, 2002
2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
The Stock Price-Volume Linkage on the Toronto Stock
Exchange: Before and After Automation
College of Business Administration, Northeastern University
Abstract. This paper investigates the information content of trading volume on the Toronto Stock Exchange
before and after the move towards fully electronic trading. It is argued that if price discovery improves under
electronic trading, the predictive power of volume should be less signiﬁcant. The empirical analysis supports
more accurate price discovery under electronic trading. Results from both the structural and vector autoregression
models indicate that the predictive power of volume for price variability disappears after full automation.
Keywords: electronic trading, information, price-volume linkage
JEL Classiﬁcation: G14, G15
The stock price-volume relation has been the subject of many studies. Early theoretical
models, such as the mixture of distributions model (MDM) of Clark (1973) and the sequen-
tial information ﬂow model (SIF) of Copeland (1976), suggest that volume and price are
Relying on the motivation of these models, numerous papers test and
consistently ﬁnd evidence for a positive contemporaneous correlation between volume and
price variability on equity markets. Karpoff (1987) provides an extensive review of this
Among the more recent theoretical studies on the role of trading volume in asset markets,
Blume, Easley and O’Hara (1994) and Suominen (2001) investigate the information content
of volume on ﬁnancial markets. Both of these papers suggest that stock prices are noisy
and cannot convey all available information to market participants and that volume could
be used as an informative statistic. Blume, Easley and O’Hara (1994) show that traders
learn from volume and use it in their decision-making because volume conveys information
about the precision of the informative signal that reaches the market. In Suominen (2001),
volume is informative because it helps to resolve information asymmetries. He shows that
traders estimate the availability of private information using past volume and adjust their
strategies. A common conclusion of these studies is that volume conveys information to
the market that cannot be obtained from price alone and signiﬁcant linkages are suggested
between past volume and future price variability.
Address correspondence to: Cetin Ciner, Assistant Professor of Finance, 413 Hayden Hall, Northeastern Univer-
sity, Boston, MA, 02115. Tel.: 617-373 4775.