Call auction transparency and market liquidity, evidence from the Shanghai Stock Exchange
This paper examines the impact of pre-trade information transparency in pre-open call auction on market liquidity on the Shanghai Stock Exchange (SHSE). We examine the natural experiment affected by the Shanghai Stock Exchange in July 2006 when it changed its pre-open auction algorithm from an entirely black box into a limited transparent system with a closed order book. We find that the increase in pre-trade information transparency coincides with a statistically significant reduction in spread at the best quotes. The reduction in spread persists even after controlling for known determinants of depth. Furthermore, there is also evidence of a statistically significant reduction in market depths. Finally, the ratio of trading volume to total volume during call auction increases significantly over the first 15 minutes of continuous trading. We conclude that in a more transparent call auction, the change from an entirely black box into a limit transparent limit order book has led to an improvement in market quality in terms of market liquidity and increased participation in the call auction by investors.
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