Low-Latency Trading and Price Discovery: Evidence from the Tokyo Stock Exchange in the Pre-Opening and Opening Periods

Abstract

We study whether the presence of low-latency traders (including high-frequency traders (HFTs)) in the pre-opening period contributes to market quality, defined by price discovery and liquidity provision, in the opening auction. We use a unique dataset from the Tokyo Stock Exchange (TSE) based on server-IDs and find that HFTs dynamically alter their presence in different stocks and on different days. In spite of the lack of immediate execution, about one quarter of HFTs participate in the pre-opening period, and contribute significantly to market quality in the pre-opening period, the opening auction that ensues and the continuous trading period. Their contribution is largely different from that of the other HFTs during the continuous period.JEL classification: G12, G14. Key-words: High-Frequency Traders (HFTs), Pre-Opening, Opening Call Auction, Price Discovery, Liquidity provision. * Bellia and Pelizzon are with SAFE, Goethe University and Ca' Foscari University of Venice. Subrahmanyam is with Leonard N. Stern School of Business, New York University. Uno is with Waseda University and Ca' Foscari University of Venice and Yuferova is with Norwegian School of Economics (NHH). We are grateful to Jonathan Brogaard, Austin Gerig, Björn Hagströmer, Joel Hasbrouck, Frank Hatheway, Terry Hendershott, Andrei Kirilenko, Mark van Achter, anonymous high-frequency traders, and participants at the FMA European Conference 2015, the 4th International Conference on the Industrial Organization of Securities and Derivatives Markets: High Frequency Trading, the SAFE Microstructure Workshop, Goethe University, the Conference on Securities Markets Trends, Risks and Policies, CONSOB-BAFFI CAREFIN, Bocconi University, the Swiss Society for Financial Market Research SGF Conference, the Nippon Finance Association Meeting, and the CFS Conference on High Frequency Trading, for helpful suggestions. We also thank the Tokyo Stock Exchange for providing us with anonymous detailed account-level data, which formed the basis of the research reported on in this paper. This work was carried out with the generous financial support of EUROFIDAI, which we appreciate. We also thank the Research Center SAFE, funded by the State of Hessen Initiative for Research (LOEWE), for financial support. Darya Yuferova also gratefully acknowledges the Vereniging Trustfonds Erasmus Universiteit Rotterdam for supporting her research visit to NYU Stern and is also grateful to Rotterdam School of Management, Erasmus University, where some work on this paper was carried out during her PhD studies.Global equity markets have been fundamentally altered in the past decade due to vast improvements in the speed of trading and the consequent fragmentation of market activity. Among other changes, in many markets, traditional market makers have been replaced by high-frequency traders (HFTs), operating at the level of a few milliseconds or even mi- croseconds.1 This increase in trading speed allows markets to operate far beyond human capabilities, given that the average t...

Dynamical Regularities of US Equities Opening and Closing Auctions

“…This also happens for other assets either at the opening or closing auctions. According Bellia et al (2016), cancellations near auction ending time are mostly due to high-frequency traders. The behavior of this quantity on US exchanges is markedly different from that of Paris Stock Exchange for which Challet (2019) finds that the number of events increases as a power-law until the auction time.…”

“…More recently, and more in line with our paper, Boussetta et al (2016) study the French Stock exchange and find that different kind of market participants enter the pre-auction periods at markedly different times, the slow brokers acting first, while high-frequency traders tend to be active nearer the end of auctions. In the same vein, Bellia et al (2016) show how and when low-latency traders (identified as high frequency traders) add or remove liquidity in the pre-opening auction of the Tokyo Stock Exchange. Lehalle and Laruelle (2018) devote part of a chapter to auctions in a spirit close to ours, in particular regarding typical daily activity patterns.…”