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Opening and Closing the Market: Evidence from the London Stock Exchange

  • Ellul, Andrew
  • Shin, Hyun Song
  • Tonks, Ian

We investigate the performance of call markets at the open and close using a unique natural experiment provided by the London Stock Exchange where traders can choose between a call and an off-exchange dealership system. Although the call market dominates dealers in terms of price discovery, it suffers from a high failure rate to open and close trading especially when trading conditions are difficult. The call's trading costs increase with asymmetric information, slow trading, order flow imbalances, and uncertainty. Traders' resort to use of call auctions is negatively correlated with firm size, implying that the call may not be the optimal method for opening and closing trading of medium and small sized stocks.

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Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 40 (2005)
Issue (Month): 04 (December)
Pages: 779-801

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Handle: RePEc:cup:jfinqa:v:40:y:2005:i:04:p:779-801_00
Contact details of provider: Postal: Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK
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  1. Lin, Ji-Chai & Sanger, Gary C & Booth, G Geoffrey, 1995. "Trade Size and Components of the Bid-Ask Spread," Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 1153-83.
  2. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Kjell G. Nyborg & Kristian Rydqvist & Suresh M. Sundaresan, 2002. "Bidder Behavior in Multiunit Auctions: Evidence from Swedish Treasury Auctions," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 394-424, April.
  4. Charles Cao & Eric Ghysels & Frank Hatheway, 2000. "Price Discovery without Trading: Evidence from the Nasdaq Preopening," Journal of Finance, American Finance Association, vol. 55(3), pages 1339-1365, 06.
  5. Bruno Biais & Pierre Hillion & Chester Spatt, 1999. "Price Discovery and Learning during the Preopening Period in the Paris Bourse," Journal of Political Economy, University of Chicago Press, vol. 107(6), pages 1218-1248, December.
  6. Pagano, Marco, 1986. "Trading Volume and Asset Liquidity," CEPR Discussion Papers 142, C.E.P.R. Discussion Papers.
  7. Michael J. Barclay, 2003. "Price Discovery and Trading After Hours," Review of Financial Studies, Society for Financial Studies, vol. 16(4), pages 1041-1073.
  8. Ananth N. Madhavan, . "Trading Mechanisms in Securities Markets," Rodney L. White Center for Financial Research Working Papers 16-90, Wharton School Rodney L. White Center for Financial Research.
  9. Madhavan, Ananth & Panchapagesan, Venkatesh, 2000. "Price Discovery in Auction Markets: A Look Inside the Black Box," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 627-58.
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