Opening and closing the market: evidence from the London Stock Exchange

Andrew Ellul, Hyun Song Shin and Ian Tonks

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Various markets, particularly NASDAQ, have been under pressure from regulators and market participants to introduce call auctions for their opening and closing periods. We investigate the performance of call markets at the open and close from a unique natural experiment provided by the institutional structure of the London Stock Exchange. As well as a call auction, there is a parallel off-exchange dealership system at both the market's open and close. Although the call market dominates the dealership system in terms of price discovery, we find that the call suffers from a high failure rate to open and close trading, especially on days characterized by difficult trading conditions. In particular, the call's trading costs increase significantly when (a) asymmetric information is high, (b) trading is expected to be slow, (c) order flow is unbalanced, and (d) uncertainty is high. Furthermore, traders' resort to call auctions is negatively correlated with firm size, implying that the call auction is not the optimal method for opening and closing trading of medium and small sized stocks. We suggest that these results can be explained by thick market externalities.

Keywords: call markets; dealership markets; opening and closing markets; international (search for similar items in EconPapers)
JEL-codes: G1 G2 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2004-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://eprints.lse.ac.uk/24753/ Open access version. (application/pdf)

Related works:
Journal Article: Opening and Closing the Market: Evidence from the London Stock Exchange (2005)
Working Paper: Opening and Closing the Market: Evidence from the London Stock Exchange (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24753

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