Call Auction Transparency and Market Liquidity: Evidence from China

Abstract

This paper uses the natural experiment offered by the Shanghai Stock Exchange to investigate the impact of opening call auction transparency on market liquidity. We find that the dissemination of indicative trade information during the pre-open call auction session leads to an overall improvement in stock liquidity in the continuous trading session. Bid-ask spreads narrow in the first trading hour because adverse selection risk fell significantly and there is less price volatility in the continuous market. This effect is greater for actively traded securities than illiquid securities. Our findings are robust for different lengths of sample period, different lengths of trading hours after market open, and stocks that had (and had not) reformed the share split structure during our research period.

A Good Beginning Makes a Good Market: The Effect of Different Market Opening Structures on Market Quality

“…In contrast to some of the empirical literature (e.g., [ 25 , 26 ]) our experimental results provide no support for the conjecture that a higher level of transparency in the call auction has a positive influence on the market quality in the subsequent CDA. On the contrary, they seem to be more in line with the arguments of Domowitz and Madhavan [ 6 ], who show that excessive transparency can have a negative influence on market quality.…”

“…Gerace et al [ 25 ] analyze the spillover effect of a more transparent opening call auction on continuous trading at the Shanghai Stock Exchange (SHX). The authors report that the volatility and spreads during intraday trading were reduced after the introduction of indicative prices.…”

Overnight momentum, informational shocks, and late informed trading in China

“…Besides the continuously trading system (i.e., LOB), the trading mechanism in the Chinese Ashare market is integrated with a 10-minute pre-open call auction held between 9:15 and 9:25 (Gerace et al 2015). 5 The pre-open call auction is designed to help uncover the opening price, which is the clearing price that maximizes the trading volume based on all the collected limit orders during the pre-open session.…”

How Effective are Stock Market Reforms in Emerging Market Economies? Evidence from a Panel VAR Model of the Indian Stock Market

“…Pre-open call auctions, on the other hand, has implications for market transactions cost which can be conjectured as a spillover effect of improved transparency and price discovery. For example, Gerace et al (2015) find that the dissemination of indicative trade information during the pre-open call auction session in China leads to an overall improvement in stock liquidity in the continuous trading session. 3 Bid-ask spreads narrow in the first trading hour because adverse selection risk fell significantly and there is less price volatility in the continuous market.…”