Cold Case File? Inventory Risk and Information Sharing during the pre-1997 NASDAQ Preopening

European Financial Management, Forthcoming

41 Pages Posted: 2 Apr 2012 Last revised: 5 Dec 2016

Date Written: December 5, 2016

Abstract

This paper shows that dealers in OTC markets might choose to share information about transient price pressures. Using data from the pre-1997 NASDAQ preopening, I find that the frequency and magnitude of non-positive spreads (the information-sharing vehicle) initiated by wholesalers (specialized market-makers with a high exposure to inventory risk) are strongly related to opening price reversals and daily trading imbalances. This activity is more likely to occur on days of large liquidity shocks, and it is not observed for other dealers. Overall, the obligation to absorb price pressure at a yet unknown opening price might induce dealers to communicate the direction in which the opening price should move. The findings contain lessons for the design of today's OTC markets.

Keywords: OTC Markets, Preopen, NASDAQ, Information Sharing, Inventory Information, Price Reversals

JEL Classification: G12, G14, D82

Suggested Citation

Daures, Laurence, Cold Case File? Inventory Risk and Information Sharing during the pre-1997 NASDAQ Preopening (December 5, 2016). European Financial Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2033247 or http://dx.doi.org/10.2139/ssrn.2033247

Laurence Daures (Contact Author)

ESSEC Business School ( email )

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+33 1 34 43 32 12 (Fax)

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