Market Openness and Price Discovery in Gold Markets

Abstract

This paper studies the impact of market openness on price discovery, by investigating the openness event when the Shanghai Gold Exchange (SGE) launches an international board (SGEI) for foreign investors. After the openness, foreign investors who registered as a member on SGEI can trade both on SGEI and SGE. We find that investors seem to be uninterested in the newly established SGEI but prefer to trade on SGE, where the liquidity is higher and the transaction costs are lower. Trading volume on SGEI becomes almost zero shortly after the openness event, but trading activities on SGE become more active. By opening itself to international investors, SGE’s contribution to international gold price discovery increased after controlling for other factors that may affect price discovery, such as liquidity, volatility, number of trades and quotes, number of small, medium and large trades. We also find higher relative liquidity, lower number of quotes and lower volatility increase that market’s contribution to price discovery. Large trades are negatively associated with price discovery.