Price formation in call auctions with insider information

Abstract

Purpose This study aims to investigate – theoretically and empirically – if call auctions incorporate asymmetric information into prices. Design/methodology/approach First, this study introduces a new model of price formation in a call auction with insider information. In this call auction model, insider trading gives rise to an asymmetric information component of transaction costs. Next, this study estimates the model using 20 stocks from Euronext Paris and investigates if the asymmetric information component is present. Findings The theoretical analysis reveals that call auctions incorporate asymmetric information into prices. The empirical analysis finds strong evidence for the asymmetric information component. Testable implications provide further support for the model. Practical implications Call auctions have recently been proposed as an alternative to continuous limit order book markets to overcome problems associated with high-frequency trading. However, it is still an open question whether call auctions efficiently aggregate asymmetric information. The findings of this study imply that call auctions facilitate price discovery and, therefore, are a viable alternative to continuous limit order book markets. Originality/value There is no generally accepted measure of trading costs for call auctions. Therefore, the measure introduced in this study is of great value to anyone who wants to quantify trading costs in call auctions, understand the determinants of trading costs in call auctions or compare trading costs and their components between continuous markets and call auctions. This study also contributes to the literature devoted to estimating the probability of information-based trading.

Price discovery and gains from trade in asset markets with insider trading

“…Using a controlled laboratory experiment, we show that the call auction's good performance in terms of informational efficiency is not restricted to situations where information is symmetrically 20 dispersed, but also extends to situations with a single insider. Moreover, the finding that call auctions are more informationally efficient than continuous double auctions, despite the low trading volume, is also consistent with recent empirical evidence that call auctions auction prices incorporate insider information in markets that are deemed too illiquid to be organized as continuous double auctions (Brünner, 2019).…”

Research on Price Formation Based on Resource Optimization Allocation

“…In addition to supply and demand, price is influenced by power, market structure, customs, rules, practices, and conventions, among other factors (De Andrade, 2019) [16]. Research based on information asymmetry explores relaxing the assumptions of a perfectly competitive market (Yan Xiaoting et al, 2017) [17] and follows pricing principles in an imperfectly competitive market (Peng Guofu et al, 2017) [18].Some scholars, from the perspective of assessment and evaluation, argue that price is not only the non-intermediary result of rights relations or trial and error and gradual adjustments (Garcia-Parpet, 1986) [19] but also describe the formation and discovery of price as a process where transaction prices adjust to new information (Brünner, 2019) [20] and are determined through multiple evaluations and tests based on commitments to exchange property (Maude Plante, 2022) [21], among others.…”