An analysis of the opening mechanisms of Exchange Traded Fund markets

We examine the opening of Exchange Traded Fund (ETF) markets in a multimarket trading environment. We find that the opening trades on the American Stock Exchange (AMEX) are the most costly. This result is consistent with the market power hypothesis which suggests that the specialists use their infor...

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Bibliographic Details
Published in:The Quarterly review of economics and finance 2009-05, Vol.49 (2), p.562-577
Main Authors: Nguyen, Vanthuan, Phengpis, Chanwit
Format: Article
Language:English
Subjects:
Consolidation
Exchange Traded Funds
Exchange Traded Funds Opening Intraday patterns Price discovery Price efficiency Market transparency Fragmentation Consolidation
Fragmentation
Intraday patterns
Market transparency
Opening
Price discovery
Price efficiency
Securities markets
Securities trading
Stock exchanges
Stock prices
Studies
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Summary:We examine the opening of Exchange Traded Fund (ETF) markets in a multimarket trading environment. We find that the opening trades on the American Stock Exchange (AMEX) are the most costly. This result is consistent with the market power hypothesis which suggests that the specialists use their informational advantage about the order imbalance at the open or take advantage of the inelastic demand at the open by imposing wider spreads. We also find that the transparent opening mechanisms of the New York Stock Exchange (NYSE) and Electronic Communication Networks (ECNs) enable them to facilitate greater price discovery at the opening and to have more efficient opening prices. This result implies that the transparency effect dominates the market power effect. Further, we find that peripheral markets do not passively free ride on information revealed through the AMEX because their opening trades contribute significantly to the price discovery process.
ISSN:1062-9769
1878-4259
DOI:10.1016/j.qref.2008.06.001