The impact of the suspension of opening and closing call auctions: evidence from the National Stock Exchange of India

Abstract

We study the impact of the suspension of opening and closing call auctions by the National Stock Exchange of India in 1999. We compare volatility, efficiency and liquidity (VEL) of securities before and after suspension, and estimate the value of the auctions using an event study. Following suspension, VEL improved and the CARs were significant but not uniformly positive or negative. Also, less liquid stocks traded less in the auctions than other securities, especially at the opening, and they experienced gains following suspension. This is consistent with there being liquidity externalities associated with auctions, as appears to be the case in some industrial countries. We conclude that opening and closing call auctions may not necessarily improve share trading in a less liquid emerging market.

The Impact of Stock Market Structure on Volatility: Evidence from a Call Auction Suspension

“…These findings challenge the intuition that by aggregating the orders of a cross-section of traders, call auctions enhance price discovery and reduce the dispersion of prices around fundamental values. The above evidence is in line with that of Camilleri and Green (2009) and Camilleri (2015) that the NSE call auctions were less effective than one may expect. Despite this, the results of this paper differ from prior studies outlined above which associated the presence of call auctions with reduced volatility (Comerton-Forde, 1999;Chang et.…”

“…For instance, Camilleri and Green (2009) reported that only 7% to 18.6% of the less liquid stocks in their sample traded in the NSE opening auction. Nonetheless, given that in this paper we use index data which are computed through a portfolio of highly liquid stocks, such factors might not have any direct impacts on our findings.…”

“…Camilleri and Green (2009) reported contradictory evidence regarding volatility changes following the auction suspension on NSE. They noted a significant reduction in price dispersion during the trading day but a significant increase in volatility in terms of the tendency for overnight returns to reverse at a subsequent stage.…”

“…Camilleri and Green (2009) established that the software glitches did not affect the pricing process, with the possible exception of the closing auction held on the 8 th June. The authors also noted that closing auctions were more active than the opening ones.…”

“…This occurrence was considered in prior studies by Camilleri and Green (2009) and Camilleri (2015), which offer mixed evidence as to the overall efficacy of these auctions. In the former investigation it was found that intra-day volatility decreased significantly following the suspension, yet overnight return reversals became significantly higher.…”