Price Discovery in Auction Markets: A Look Inside the Black Box

Opening mechanisms play a crucial role in information aggregation following the overnight nontrading period. This article examines the process of price discovery at the New York Stock Exchange single-price opening auction. We develop a theoretical model to explain the determinants of the opening pri...

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Bibliographic Details
Published in:The Review of financial studies 2000-10, Vol.13 (3), p.627-658
Main Authors: Madhavan, Ananth, Panchapagesan, Venkatesh
Format: Article
Language:English
Subjects:
Auctions
Automation
Business orders
Dealers
Excess demand
Information economics
Institutional investments
Inventory
Inventory control
Limit orders
Market
Market prices
Mathematical models
Opening prices
Price level
Price stabilization
Price theory
Prices
Securities markets
Securities trading
Statistical variance
Stock exchanges
Stock prices
Studies
Trade
Trade specialization
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Summary:Opening mechanisms play a crucial role in information aggregation following the overnight nontrading period. This article examines the process of price discovery at the New York Stock Exchange single-price opening auction. We develop a theoretical model to explain the determinants of the opening price and test the model using order-level data. We show that the presence of designated dealers facilitates price discovery relative to a fully automated call auction market. This is consistent with specialists extracting information from observing the evolution of the limit order book. In addition, the specialist's opening trade reflects noninformational factors such as price stabilization requirements.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/13.3.627