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Closing Call Auctions at the Index Futures Market

Authors


  • We thank an anonymous referee, Ai Jun Hou, Hao Zhang, Yakai Chang, and participants at the Arne Ryde Workshop on Financial Economics (Lund University, 2011), the 24th Australasian Finance and Banking Conference (Sydney, 2011), the Campus for Finance Research Conference (Vallendar, 2012), the European Financial Management Association Meetings (Barcelona, 2012), and seminar participants at NASDAQ-OMX (Stockholm, 2011) and Stockholm University (2011), for their comments and help. Remaining errors are our own. We are grateful to the Jan Wallander and Tom Hedelius foundation and the Tore Browaldh foundation for research support.

Abstract

We investigate the effects from the introduction of a closing call auction (CCA) at the index futures market. Limit order book models, where trader patience determines trading strategies, predict that a CCA increases trader patience and, hence, improves closing price accuracy and end-of-day liquidity. We find that the introduction leads to increased trader patience, improved futures closing price accuracy, unaffected tightness and resiliency, and decreased depth. Decreased depth is likely due to less order fishing activity. With the CCA, opportunistic patient traders' posting of limit orders deep in the order book, to profit from impatient traders, is no longer feasible. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:299–319, 2014

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