A rare move: The effects of switching from a closing call auction to a continuous trading

Abstract

This study investigates the effects of switching to a closing continuous trading (CCT) on market quality, while considering the trading behaviors of different types of traders. Investors become more patient in the period preceding the last trading phase, which reduces the bid-ask spread (BAS) in that period. We find an increase in the BAS and volatility during the last trading phase, due to diminishing investor patience. Market volatility and the closing pricing errors relate positively to the trading activities of foreign institutional investors. Overall, the introduction of the CCT worsens the market quality before the closing. K E Y W O R D Sclosing call, continuous trading, market quality, price discovery, trading activity J E L C L A S S I F I C A T I O NG14, G15, G18 their trading to the new closing environment. In so doing, this study attempts to fill a gap in existing literature with a more complete analysis of whether, why, and how a rare switch from a CCA to the CCT might affect the trading behavior of different types of traders and thereby influence market quality.In a call market, buy-and-sell orders accumulate over a specified time interval for simultaneous execution in a batched trade, at a single price. In a continuous market, a trade instead may occur at any time that a bid and offer match or cross. Multiple theoretical models (e.g.

Intraday analysis of regulation change in microstructure: evidence from an emerging market

“…A limited number of studies have investigated the effect that the replacement of SPCA with MPCT and the extension of trading hours has had on intraday microstructures, volume and volatility. Chang et al (2020) noted that replacing SPCA with MPCT is an uncommon practice.…”

“…On 4 October 2019, an important change in the microstructure of Borsa Istanbul was implemented whereby the lunch break (LB) and the single price call auction 1 (SPCA), which had been held during LB, was replaced with multi-price continuous trading (MPCT). As stated by Chang, Chou, and Yang (2020), replacing SPCA with MPCT is a very rare occurrence.…”

“…Apart from Chang et al (2020), none have investigated the effect of replacing SPCA with MPCT on volume and volatility in the last 15 years. This study fills this gap.…”

“…This study fills this gap. Furthermore, this study differs from Chang et al (2020), as it examines the effects of both the replacement of SPCA with MPCT as well as the conversion of lunch break into MPCT. These simultaneous events make this study unique, as these two events are very rare.…”

Effectiveness of the conditional random‐end trading mechanism on the Korea Exchange: Normal trade and Option Shock

“…Our study allows us to obtain insight on how to set the parameters of the RE trading mechanism for a specific market with a given level of maturity. Second, the closing call auction is especially important in derivatives markets because the closing price is generally used to compute the settlement of derivative positions (Chang et al, 2020). However, as Option Shock demonstrates, price manipulation can be done in the stock and derivatives markets together to create arbitrages, so the details of the closing call auction, including the RE feature, need careful scrutiny of the type we carry out.…”