centralized exchanges, securities clearance and settlement systems, trading platforms, and custody arrangements. These reforms were expected to improve market performance, by increasing liquidity, enhancing efficiency, and reducing trading costs. We focus our analysis on the replacement of traditional trading floors, on which brokers manually match orders using an open outcry system, by fully automated electronic trading systems. Electronic trading systems may increase liquidity and improve efficiency by reducing transaction costs and increasing information availability. These trading systems may also attract new pools of liquidity, by providing affordable remote access to investors.<sup>22</sup> The dates of the introduction of electronic trading systems come from Jain (2005), who collects data on stock exchanges in 120 countries and finds that the leading exchanges in 101 of those countries have introduced electronic trading over the last 25 years.<sup>23</sup> He finds evidence that the introduction of electronic trading systems enhances liquidity and leads to a reduction in the cost of capital.

In the last twenty years, governments from all over the world have undertaken significant privatization programs. Worldwide revenues from privatization soared during the 1990s, peaking in 1998 at over 100 billion U.S. dollars (OECD, 2001). This privatization process was motivated by the desire to increase government revenues, promote economic efficiency, and reduce government interference in the economy (see Megginson and Netter, 2001 for a review of the empirical literature on privatization). Domestic capital market development was also an explicit objective of privatization programs in many countries. Privatizations had a direct impact on domestic stock markets, as many governments carried out privatization sales through share offerings on local exchanges. Due to the positive externalities generated by listing decisions, these share issues were expected to foster stock market development, by increasing the diversification opportunities available to investors and therefore encouraging trading activity and new listings by private firms (Pagano, 1989, 1993). Share issue privatizations (SIPs) could also increase the participation of uninformed retail investors in local stock exchanges, reducing adverse selection in the market and increasing liquidity (Kyle, 1985).<sup>24</sup> Perotti and van Oijen (2001) argue that privatization programs, even without share offerings on local exchanges, may foster stock market development by reducing political risk and signaling commitment to market-oriented policies. Privatizations also had a direct impact on

> 22 See Domowitz and Steil (1999) for a discussion of the impact of electronic trading on the exchange industry. Blennerhasset and Bowman (1998) report a fall in transaction costs after the move to electronic trading in the New Zealand Stock Exchange. Green et al. (2003) also find improvements in efficiency and liquidity following the introduction of screen-based trading in the Mumbai Stock Exchange.

> 23 We consider the introduction of a fully automated system as the relevant change. Jain (2005) finds that in 11 of the exchanges covered in his paper floor trading coexists with electronic trading. We exclude these exchanges from the analysis.

> 24 See Chiesa and Nicodano (2003) for a review of the theoretical arguments on the impact of privatization on stock market development. Bortolotti et al. (2004) analyze the impact of SIPs in 19 developed countries and find that they are associated with improvements in turnover and liquidity.

8