Order Consolidation, Price Efficiency, and Extreme Liquidity Shocks
44 Pages Posted: 12 Nov 2003
Date Written: July 31, 2006
We show that the consolidation of orders is important for producing efficient prices, especially during times of high liquidity demand. The NYSE's centralized opening call market performs better than Nasdaq's decentralized opening process on typical trading days. The NYSE is much better than Nasdaq on witching days, when index arbitrage activity subjects S&P 500 stocks to large, predictable, and mostly informationless order flow around quarterly futures contract expirations. Nasdaq opening price efficiency improves to NYSE levels once Nasdaq initiates a consolidated opening call in November 2004, but prices on the decentralized Nasdaq remain less efficient at other times of day.
Keywords: Market structure, price discovery, price efficiency, volatility, liquidity
JEL Classification: G14
Suggested Citation: Suggested Citation