The Capital Markets Cooperative Research Centre (CMCRC) has found the potential to glean information contained in early-opening stocks, influences the trading of stocks that open later in the sequence.
Australian equity markets have the distinctive feature of a single price auction where stocks open for trading with a delay in alphabetical sequence rather than simultaneously - auctions similar to this are utilised by many exchanges around the world.
For a stock that opens down sequence, the price-relevant information may be extracted from the trading process of comparable stocks in earlier batches in addition to the preopening order evolution.
Researcher Kevin Sun said while pre-opening price discovery has been widely studied, the potential to infer information from comparable stocks opening earlier in the auction had been largely unexplored.
“Our analysis found that there definitely seemed to be a cross-stock learning process happening in the period before opening of later stocks. The indicative opening prices of later stocks exhibit greater informational efficiency.”
Mr Sun said the team had also taken into account the potential impact of the structural change on November 28, 2005 when the ASX switched to an anonymous trading system. “We found cross-stock learning is less prevalent in an anonymous market,” he said.
The research sample included constituents stocks of the S&P/ASX 500 index at any time from November 2004 to December 2006. Sample stocks were relatively evenly distributed across the five opening groups that are defined by the ASX based on the alphabetical sequence of stock code.
The results of the analysis are useful for regulators in evaluating the effectiveness of policy making and designing the optimal opening mechanism. The study is also useful for traders in formulating their trading strategies.