Call auction transparency and market liquidity: The Shanghai experience

摘要

On July 1 2006, the Shanghai Stock Exchange (SHSE) changed its pre-market opening auction system from an entirely black box into a more transparent system with indicative auction prices, indicative equilibrium volume and indicative unexecuted volume disseminated in real time throughout the pre-opening period. This paper use the natural experiment offered by SHSE to investigate the impact of opening call transparency on market liquidity. The dynamics of the opening process and its impact on trading activity for the rest of the day is of interest to traders because traders can either cluster their trades during the non-trading period or withhold their orders until the market opens. We find that following the introduction of transparency to the call auction process, there is increased participation during the call auction and reduction in the volume of orders placed in the continuous market. Uncertainty is eased, resulting in lower price volatility and narrower proportional bid-ask spreads. But we find it to be detrimental to the liquidity and spreads of thinly traded stocks.