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The effect of a closing call auction on market quality and trading strategies

Eugene Kandel (), Barbara Rindi () and Luisella Bosetti

Journal of Financial Intermediation, 2012, vol. 21, issue 1, 23-49

Abstract: We study the effects of the introduction of a closing auction (CA) on the microstructure on the continuous trading phase in Borsa Italiana and Paris Bourse. We postulate and compare several empirical predictions based on both standard Kyle-type models and more recent models of limit order book. We find that while the CA has no effect during most of the day, its effect on the last minutes of trading is dramatic. We document a sharp decline in volume, associated with a significant reduction in spread and volatility, and an increase in aggressiveness of liquidity suppliers during the last minutes. We show that the differences in the Reference Price algorithm between Milan and Paris have a significant effect: the CA attracts greater volumes when the Reference Price is equated to the CA price.

Keywords: Market design; Reference price; Closing auction; Closing price; Market quality; Price discovery; Liquidity provision (search for similar items in EconPapers)
JEL-codes: G14 G15 G18 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1016/j.jfi.2011.03.002

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Handle: RePEc:eee:jfinin:v:21:y:2012:i:1:p:23-49