Does a pre-open matter in fragmented markets?

Abstract

Opening of markets, which might differ across trading venues, is crucial for the daily price discovery. Using a unique dataset of stocks cross-traded on Euronext (which opens with a call auction preceded by a preopening phase) and Chi-X (which does not), we find that despite a drastic reduction of the opening volume from 10% in the 1990s to 1.5%, a preopen still eases price discovery on Euronext but also on Chi-X. Surprisingly, we document evidence of early activity in the preopening period and show that early indicative clearing prices also facilitates price discovery. Exploring the data on preopening orders and messages by speed and account type, we find that the preopen 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. Interestingly, these early order imbalances contribute to price discovery around the open on both Euronext and Chi-X.

Keywords: price discovery, market fragmentation, preopening period, call auction

JEL Classification: G14, G20