Price Discovery without Trading: Evidence from the Nasdaq Preopening


  • Charles Cao,

  • Eric Ghysels,

  • Frank Hatheway

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    • Penn State University; Ghysels is also at CIRANO. We thank an anonymous referee, René Stulz (the editor), Gurdip Bakshi, Bruno Biais, Ananth Madhavan, Leslie Marx, Ron Masulis, Harold Mulherin, Ken Nyholm, Paul Schultz, Lemma Senbet, Erik Sirri, George Sofianos, Chester Spatt, Hans Stoll, and seminar participants at Penn State University, the SEC, the University of Maryland, George Washington University, 1998 EFA meetings, the 1998 Market Microstructure Conference in Paris, 1999 AFA meetings, the 1999 Nasdaq-Notre Dame Microstructure Conference, and 1999 WFA meetings for helpful comments. Mike Chernov provided invaluable research assistance. This paper was selected for the NYSE Award for Best Paper on Equity Trading at the 1999 WFA meetings.


This paper studies Nasdaq market makers' activities during the one and one-half hour preopening period. Price discovery during the preopening is conducted via price signaling as opposed to the auction used to open the NYSE or the continuous market used during trading. In the absence of trades, Nasdaq dealers use crossed and locked inside quotes to signal to other market makers which direction the price should move. Furthermore, we find evidence of price leadership among market makers that bears little resemblance to their IPO/SEO lead underwriter participation.