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

Andrew Ellul · Hyun Song Shin · Ian Tonks

81 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Financial Markets and Investment Strategies Corporate Finance and Governance Finance, Markets, and Regulation

Abstract

Abstract 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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References

1982Aggregate Demand Management in Search Equilibrium 1993Stealth trading and volatility 2004An Efficient Ascending-Bid Auction for Multiple Objects 1989Trading Volume and Asset Liquidity 1995Trade Size and Components of the Bid-Ask Spread 1992Trading Mechanisms in Securities Markets 2003Price Discovery and Trading After Hours 1999Price Discovery and Learning during the Preopening Period in the Paris Bourse

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2007Overnight information and stochastic volatility: A study of European and US stock exchanges 2010The Effect of a Closing Call Auction on Market Quality and Trading Strategies 2008How does the call market method affect price efficiency? Evidence from the Singapore Stock Market 2014Opening and closing price efficiency: Do financial markets need the call auction?2008Market quality changes in the London Stock Market 2007Splitting orders in overlapping markets: A study of cross-listed stocks

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