High Frequency Traders without Trading: Price Discovery and Liquidity Provision in the Pre-Opening Period

Abstract

High-frequency traders (HFTs) contribute significantly to price discovery in the pre-opening
period, and liquidity provision in the opening auction, on the Tokyo Stock Exchange (TSE), even though there is no trade in this period. We use a change in market design by the TSE (known as "Arrowhead") as a natural experiment in the time-series dimension of a positive shock to HFT activity. Similarly, in the cross-sectional dimension, we use the activity of HFTs during the pre-opening period. We conclude, based on these two analyses, that more efficient price discovery during the pre-opening period is associated with greater HFT activity.

Keywords: : High-Frequency Traders (HFTs), Pre-Opening, Opening Call Auction, Price Discovery, Liquidity provision

JEL Classification: G12, G14