Strategic Order Submission and Cancellation in Pre-Opening Periods: The Case of IPO Firms
52 Pages Posted: 22 Mar 2009 Last revised: 22 May 2016
Date Written: September 1, 2015
In order-driven markets, orders can be strategically submitted at aggressive prices during the pre-opening phase and withdrawn just before trading commences. Based on a Kyle (1989) setting, we develop several predictions regarding how such "strategic" orders can temporarily distort price discovery despite their non-binding nature. Evidence from IPO firms, where market prices are determined for the first time, supports our predictions. Strategic orders are concentrated among firms with substantial valuation uncertainty and small investor presence. Their submission leads to significant changes in the indicative opening price that are not subsequently reversed by their withdrawal, but only in post-opening trading activity.
Keywords: Pre-opening periods, initial public offerings, price discovery, market manipulation
JEL Classification: G24, G32
Suggested Citation: Suggested Citation