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How to Open and Close the Market: Lessons from the London Stock Exchange

58 Pages Posted: 12 May 2002  

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); University of Naples Federico II - CSEF - Center for Studies in Economics and Finance

Hyun Song Shin

Bank for International Settlements

Ian Tonks

University of Bath School of Management

Date Written: November 21, 2003

Abstract

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

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

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Hyun Shin

Bank for International Settlements ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

Ian Tonks (Contact Author)

University of Bath School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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