A Good Beginning Makes a Good Market: The Effect of Different Market Opening Structures on Market Quality.

Gernot Hinterleitner,Ulrike Leopold-Wildburger,Stefan Palan,Roland Mestel

doi:10.1155/2015/307808

Gernot Hinterleitner, Ulrike Leopold-Wildburger + Show 2 more

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https://doi.org/10.1155/2015/307808

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Abstract

This paper deals with the market structure at the opening of the trading day and its influence on subsequent trading. We compare a single continuous double auction and two complement markets with different call auction designs as opening mechanisms in a unified experimental framework. The call auctions differ with respect to their levels of transparency. We find that a call auction not only improves market efficiency and liquidity at the beginning of the trading day when compared to the stand-alone continuous double auction, but also causes positive spillover effects on subsequent trading. Concerning the design of the opening call auction, we find no significant differences between the transparent and nontransparent specification with respect to opening prices and liquidity. In the course of subsequent continuous trading, however, market quality is slightly higher after a nontransparent call auction.

Highlights

The opening of markets is a crucial time in the trading day, because it constitutes the starting point of the price discovery process and the beginning of the incorporation of overnight information into prices
We find that a call auction improves market efficiency and liquidity at the beginning of the trading day when compared to the stand-alone continuous double auction, and causes positive spillover effects on subsequent trading
(1) A call auction is well-suited as a market opening institution, generating a higher market quality at this time of market stress than opening directly with continuous trading

Summary

A Good Beginning Makes a Good Market

This paper deals with the market structure at the opening of the trading day and its influence on subsequent trading. We compare a single continuous double auction and two complement markets with different call auction designs as opening mechanisms in a unified experimental framework. The call auctions differ with respect to their levels of transparency. We find that a call auction improves market efficiency and liquidity at the beginning of the trading day when compared to the stand-alone continuous double auction, and causes positive spillover effects on subsequent trading. Concerning the design of the opening call auction, we find no significant differences between the transparent and nontransparent specification with respect to opening prices and liquidity. In the course of subsequent continuous trading, market quality is slightly higher after a nontransparent call auction

Introduction

Materials and Methods

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