Publication Details

Gerace, D., Tian, G. G. & Zheng, W. (2009). Call auction transparency and market liquidity: The Shanghai experience. Asian Finance Association 2009 Conference (pp. 1-28). Brisbane, Australia: University of Queensland.


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