Closing Call Auctions at the Index Futures Market

Abstract

This paper investigates how the introduction of a closing call auction in the OMXS 30 index futures market influences market quality and price accuracy. Index futures markets are characterized by traders with no or little private information. Limit order book models where trader patience (rather than private information) determines trading strategies, predict that a closing call auction increases trader patience and hence improves closing price accuracy and end-of-day market liquidity. We analyze futures market liquidity in three dimensions: tightness, depth, and resiliency. Our empirical results show that the closing call auction indeed leads to increased trader patience and successfully improves the futures closing price accuracy. However, tightness and resiliency are unaffected by the regulatory change, and depth is decreasing. We hypothesize that the depth effect is due to an “order fishing” phenomenon, which is not considered in current theoretical models. When the potential of large market orders is high, opportunistic patient traders post limit orders in the depth of the order book to profit from impatient traders. In line with our hypothesis, order fishing activity increases sharply in the last minute of the trading day. When the closing call auction is introduced, and trader patience increases, the order fishing behavior vanishes.

Keywords: Call auctions, Index futures, Trader patience, Liquidity, Price discovery

JEL Classification: G14, G15