The impact of the closing call auction: an examination of effects in London

Abstract

This article examines the impact on market quality that the introduction of a closing call auction had at the London Stock Exchange (LSE). Using the market model approach of Cohen et al. (1983a, b) we show that opening and closing market quality improved for those Financial Times and Stock Exchange 100 (FTSE 100) securities participating in the closing call. A control sample of stocks is not characterized by discernable changes to market quality.

Notes

¹ In 2003 additional changes saw the introduction of SETSmm for mid-cap securities. SETSmm was an auction system supported by market maker intervention. In 2007 SETS and SETSmm securities began trading on the same system re-named SETS. This was an auction system which also offered dealer quotes.

² Moreover, inaccuracies in price discovery compound as the measurement interval is lengthened, trading frictions can distort the relation between individual stocks returns and market index returns not only for short intervals but also for longer intervals.

³ In 2003 and 2005 a large number of securities have been allowed to migrate from SEAQ to a market maker supported auction system called SETSmm. Although these securities also engage in a closing auction for this group it is impossible to isolate the effect of the closing auction from general enrichments associated with a move to auction trading. For this reason we focus only on those firms that moved to a closing call in 2000.