Price Discovery in Auction Markets: A Look Inside the Black Box

Posted: 17 Jan 1998


This paper examines the process of price discovery at the New York Stock Exchange (NYSE) single price opening auction. Interest in this topic is motivated by the crucial role played by opening mechanisms in information aggregation following the overnight non-trading period. In addition, the operation of auction markets is an issue of considerable importance for new, automated trading systems as well as extant exchanges. We show empirically that specialists significantly facilitate price discovery. Specifically, the opening price set by the specialist is more efficient than the price that would prevail in a pure auction with only public orders. This is consistent with a model where specialists learn from observing the evolution of the limit order book. The specialist's opening trade reflects private information and non-informational factors such as inventory control and price continuity. We discuss the empirical and policy implications of these results.

JEL Classification: G20

Suggested Citation

Madhavan, Ananth and Panchapagesan, Venkatesh (Venky), Price Discovery in Auction Markets: A Look Inside the Black Box. Available at SSRN:

Ananth Madhavan

BlackRock, Inc. ( email )

400 Howard Street
San Francisco, CA 94105
United States

Venkatesh (Venky) Panchapagesan (Contact Author)

The Goldman Sachs Group, Inc. ( email )

85 Broad Street
New York, NY 10004
United States

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