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A call auction's impact on price formation and order routing: Evidence from the NASDAQ stock market

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  • Pagano, Michael S.
  • Peng, Lin
  • Schwartz, Robert A.

Abstract

Electronic call auctions are used globally to open and close equity market trading; as such, they are a critically important facility that needs to be better understood. The paper focuses on the impact NASDAQ's calls (introduced in 2004) have had on bid-ask spreads, price volatility, and order routing in the continuous market that follows daily openings and which precedes daily closings. NASDAQ's closing call has significantly reduced both spreads and volatility for all market capitalization groups. Its opening call similarly reduced spreads, while a generally similar, though somewhat weaker, pattern of volatility reduction was realized. Although the pattern of trading volume has, for the most part, not been significantly affected, our findings, comprehensively viewed, suggest that the calls have had a positive spillover effect on the dynamic behavior of price formation in NASDAQ's continuous market.

Suggested Citation

  • Pagano, Michael S. & Peng, Lin & Schwartz, Robert A., 2013. "A call auction's impact on price formation and order routing: Evidence from the NASDAQ stock market," Journal of Financial Markets, Elsevier, vol. 16(2), pages 331-361.
    • Handle: RePEc:eee:finmar:v:16:y:2013:i:2:p:331-361
    DOI: 10.1016/j.finmar.2012.11.001
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    More about this item

    Keywords

    Opening price; Closing price; Price discovery; Intra-day volatility; Market microstructure; Equity markets; Call auction; NASDAQ;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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