Pre-Trade Transparency in Call Auctions

Abstract

We compare the auction mechanisms of two major European stock exchanges: Euronext (Paris) and Xetra (Frankfurt). During the call phase, the French exchange discloses five levels of limit orders and has a fixed closing time. The more opaque Xetra system only discloses the virtual clearing price and volume, and randomizes the ending time. For a sample of 126 matched stocks over a two year period, we find that Euronext’s auctions are more liquid and contribute more to price discovery than Xetra´s, and are followed by lower bid-ask spreads during the first minutes of continuous trading. We also find evidence of increased institutional trading during closing auctions, particularly on Euronext. Both exchanges see significant reversals after their auctions, which may be due to manipulation or a surplus of liquidity seekers.

Keywords: Market Microstructure, Pre-trade Transparency, Liquidity, Call Auctions

JEL Classification: G14, D44, G19