Abstract
This paper explores the role of pre-opening price signals in price discovery and liquidity by analyzing the effect of Rule 48 on stock opening delay and various measures of liquidity. NYSE Rule 48 suspends the responsibility of designated market makers for disseminating pre-opening price indications in the event of extreme market-wide volatility. We show that Rule 48 speeds up the opening of stocks at the expense of lower liquidity. Specifically, the absence of pre-opening price indications results in decreases in various measures of liquidity during the first 30-minutes of the trading day that are statistically and economically significant. We interpret this finding as evidence that liquidity suppliers are less willing to provide liquidity in the absence of a reference point or benchmark regarding the value of a stock.
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