Opening and closing price efficiency: Do financial markets need the call auction?

Abstract

We model 73.62 million London Stock Exchange (LSE) trades and show that the LSE's high rate of failure to open at the opening auction only relates to low volume stocks. Low volume stock traders avoid trading until the open; this seems connected to their evading the informed trading-dominated opening auction. For the largest volume stocks, the opening auction provides highly efficient opening prices, while the lower volume stocks attain similar levels of price efficiency only after the start of normal trading hours (NTH). At the close however, all stocks only lose small fractions of informational efficiency achieved during the NTH.

Informed trading and the price impact of block trades: A high frequency trading analysis

“…The observation is also consistent for temporary price impact estimates. These results are in line with Ibikunle (2015a), who argues that a substantial fraction of price discovery occurs during the first trading hour because large amount of new information, held back during the opening auction, is released into the market early on during the continuous trading session of the day. The PIN coefficients for the other trading sub-periods of the day are not statistically significant since, as shown by Ibikunle (2015a), more than 97% of the efficient price discovery occurs prior to the last half hour of trading for FTSE 100 stocks trading on the LSE.…”

“…Overall, the DUM1 permanent price impact coefficients for both block purchases and sales are larger than the DUM1 temporary price impact coefficients. This confirms the expectation that information is accumulated overnight and is thus incorporated into the prices of stocks during the first hour of trading the next day (see also Ibikunle, 2015a).…”

“…Secondly, there is a distinctively large variation in the liquidity properties of FTSE 100 stocks. Ibikunle (2015a) show that the largest trading volume quintile FTSE 100 stocks have average trade sizes that are on average more than 33 times the size of the lowest volume quintile stocks in the same index. Thus, a 10,000-share trade in one stock could be its median while such trade could sit in above the 95 th percentile in a less liquid stock.…”

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

“…Empirically, the effects of changes in closing mechanisms appear mixed. Some studies find that the introduction of a closing call procedure improves the price discovery process and market quality (Chang, Rhee, Stone, & Tang, ; Chelley‐Steeley, ; Comerton‐Forde, Lau, & McInish, ; Ibikunle, ; Kandel, Rindi, & Bosetti, ; Pagano & Schwartz, ) . However, Sivanithy and Ng (), Comerton‐Forde and Rydge (), and Chelley‐Steeley () find no such evidence .…”

“…Kandel et al () find a significant reduction in spread and volatility and an increase in the aggressiveness of liquidity suppliers and price efficiency 10 min before the CCA. Chelley‐Steeley () and Ibikunle () also show that the least active securities in the London Stock Exchange experience the greatest improvements to market quality following the introduction of a closing call.…”