The Impact of a Closing Call Auction on Market Quality and Trading Strategies

38 Pages Posted: 2 Mar 2007

See all articles by Eugene Kandel

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)

Barbara Rindi

Bocconi University, IGIER and Baffi Carefin

Luisella Bosetti

Borsa Italiana S.p.A.

Date Written: February 2007

Abstract

We study the effects of the introduction of a call auction in the closing stages of the trading day in Borsa Italiana's (BIt) equity markets. We show that the Closing Call Auction (CCA) drastically reduces spread and volatility just before the close of trading, while having a negligible effect on the rest of the day. We attribute this change in market quality to agents' reactions to the new trading opportunity offered by the CCA. We show that the introduction of a CCA significantly reduces the cost of immediacy at the end of continuous trading, and also reduces volatility. This effect is highly concentrated in the last few minutes of continuous trading, without any discernible impact on the rest of the day. To test the robustness of our findings, we compare this outcome with that of the introduction of the CCA on Euronext Paris and find similar results. The differences can be explained in the way the two exchanges calculate the Reference Price. We also document changes in the trading aggressiveness of various types of market participants around the close.

Keywords: market structure, market quality, closing mechanism

JEL Classification: G14, G15, G18

Suggested Citation

Kandel, Eugene and Rindi, Barbara and Bosetti, Luisella, The Impact of a Closing Call Auction on Market Quality and Trading Strategies (February 2007). Available at SSRN: https://ssrn.com/abstract=967851 or http://dx.doi.org/10.2139/ssrn.967851

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics ( email )

School of Business
Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3137 (Phone)
+972 2 581 6071 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Barbara Rindi (Contact Author)

Bocconi University, IGIER and Baffi Carefin ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 58365328 (Phone)

HOME PAGE: http://faculty.unibocconi.eu/barbararindi

Luisella Bosetti

Borsa Italiana S.p.A. ( email )

Italy

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