Does a pre-open matter in fragmented markets?
52 Pages Posted: 23 Mar 2017 Last revised: 12 May 2020
Date Written: May 12, 2020
Fragmentation has fostered competition among trading venues. While some platforms rely on a preopening phase leading to an opening call auction, some others start the day without such mechanisms. Using a unique dataset of stocks cross-traded on Euronext (which features a pre-open mechanism) and Chi-X (which does not), we find that preopening orders and indicative clearing prices still contribute to the price discovery process despite a drastic reduction of the opening volume from 10% in the 1990s to 1.5%. Using an accidental glitch on Euronext that delayed both the preopen and the start of the trading session, we also show that preopening ac- tivity is not only useful for Euronext, but also for Chi-X. Finally, using information on trader speed and account type, we find that the pre-open is strategically used by slow brokers to gain time priority. They submit orders very early, especially in stocks characterized by a large tick size and on days with expected liquidity shocks. We also find that preopening orders submitted late by banks, corporate brokers with liquidity contracts, and slow brokers are more fundamentally informed and ease price discovery at the open.
Keywords: price discovery, market fragmentation, preopening period, call auction
JEL Classification: G14, G20
Suggested Citation: Suggested Citation