Opening and Closing the Market: Evidence from the London Stock Exchange
AbstractVarious 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 trading costs increase 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.
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Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp506.
Date of creation: Jul 2004
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Other versions of this item:
- Ellul, Andrew & Shin, Hyun Song & Tonks, Ian, 2005. "Opening and Closing the Market: Evidence from the London Stock Exchange," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(04), pages 779-801, December.
- Andrew Ellul & Hyun Song Shin & Ian Tonks, 2004. "Opening and closing the market: evidence from the London Stock Exchange," LSE Research Online Documents on Economics 24753, London School of Economics and Political Science, LSE Library.
- G1 - Financial Economics - - General Financial Markets
- G2 - Financial Economics - - Financial Institutions and Services
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