Article2000

Price Discovery without Trading: Evidence from the Nasdaq Preopening

Charles Cao · Éric Ghysels · Frank M. Hatheway

231 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Corporate Finance and Governance Stochastic processes and financial applications

Abstract

This paper studies Nasdaq market makers' activities during the one and one‐half hour preopening period. Price discovery during the preopening is conducted via price signaling as opposed to the auction used to open the NYSE or the continuous market used during trading. In the absence of trades, Nasdaq dealers use crossed and locked inside quotes to signal to other market makers which direction the price should move. Furthermore, we find evidence of price leadership among market makers that bears little resemblance to their IPO/SEO lead underwriter participation.

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References

1985Continuous Auctions and Insider Trading 1985Bid, ask and transaction prices in a specialist market with heterogeneously informed traders 1987Price, trade size, and information in securities markets 1983Information Effects on the Bid-Ask Spread 1991Measuring the Information Content of Stock Trades 1988Estimating the components of the bid/ask spread 1996Liquidity, Information, and Infrequently Traded Stocks 1999Conflict of Interest and the Credibility of Underwriter Analyst Recommendations

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2000Price Discovery in Auction Markets: A Look Inside the Black Box 2004Liquidity Externalities and Adverse Selection: Evidence from Trading after Hours 2000Order Flow and Liquidity around NYSE Trading Halts 2003How the Equity Market Responds to Unanticipated Events*2002Nasdaq Trading Halts: The Impact of Market Mechanisms on Prices, Trading Activity, and Execution Costs 2000Price Discovery in Initial Public Offerings and the Role of the Lead Underwriter

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