How to Open and Close the Market: Lessons from the London Stock Exchange

58 Pages Posted: 12 May 2002

See all articles by Andrew Ellul

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

Hyun Song Shin

Bank for International Settlements (BIS)

Ian Tonks

University of Bristol - Department of Finance and Accounting

Date Written: November 21, 2003

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 success decreases 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

JEL Classification: G1, G2

Suggested Citation

Ellul, Andrew and Shin, Hyun Song and Tonks, Ian, How to Open and Close the Market: Lessons from the London Stock Exchange (November 21, 2003). EFA 2002 Berlin Meetings Presented Paper, Available at SSRN: https://ssrn.com/abstract=311780 or http://dx.doi.org/10.2139/ssrn.311780

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

Ian Tonks (Contact Author)

University of Bristol - Department of Finance and Accounting ( email )

Department of Finance and Accounting
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom

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