58 Pages Posted: 12 May 2002
Date Written: November 21, 2003
Various markets, particularly NASDAQ, have been under pressure from regulators and market participants to introduce call auctions for their opening and closing periods. We investigate the performance of call markets at the open and close from a unique natural experiment provided by the institutional structure of the London Stock Exchange. As well as a call auction, there is a parallel "off-exchange" dealership system at both the market's open and close. Although the call market dominates the dealership system in terms of price discovery, we find that the call suffers from a high failure rate to open and close trading, especially on days characterized by difficult trading conditions. In particular, the call's success decreases significantly when (a) asymmetric information is high, (b) trading is expected to be slow, (c) order flow is unbalanced, and (d) uncertainty is high. Furthermore, traders' resort to call auctions is negatively correlated with firm size, implying that the call auction is not the optimal method for opening and closing trading of medium and small sized stocks. We suggest that these results can be explained by thick market externalities.
Keywords: Call markets; Dealership markets; Opening and Closing Markets; International
JEL Classification: G1, G2
Suggested Citation: Suggested Citation
Ellul, Andrew and Shin, Hyun Song and Tonks, Ian, How to Open and Close the Market: Lessons from the London Stock Exchange (November 21, 2003). EFA 2002 Berlin Meetings Presented Paper. Available at SSRN: https://ssrn.com/abstract=311780 or http://dx.doi.org/10.2139/ssrn.311780