Coming Early to the Party: High Frequency Traders in the Pre-Opening Phase and the Opening Auction of NYSE Euronext Paris

Abstract

This paper examines the strategic behavior of High Frequency Traders (HFTs) during the pre-opening phase and the opening auction of the NYSE Euronext Paris exchange. Using data provided by the Base Europeenne de Donnees Financieres a Haute Frequence (BEDOFIH), we find that HFTs actively participate in the pre-opening phase. Contrary to common wisdom, HFTs do not delay their order submission decisions until the very last moment of the pre-opening phase of the trading day. They are able to successfully extract information from the pre-opening order flow, as manifested by the potential profits they make on the positions they take in the opening auction. Furthermore, HFTs make profits on orders submitted in the last second before the opening auction; however, so do slow traders, suggesting that speed is not a necessary condition to make profits in these last second orders. HFTs lead the price discovery process during the pre-opening phase, and neither harm nor improve liquidity provision in the opening auction. Our analysis highlights that HFTs who “come early to the party” enjoy the party (they make profits), however, they also help the other market participants to enjoy the party (they improve market quality) and do not have a privileged entrance to the party (speed advantage is not a necessary condition to make profits).