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Order Consolidation, Price Efficiency, and Extreme Liquidity Shocks

Published online by Cambridge University Press:  06 April 2009

Michael J. Barclay ,
Terrence Hendershott  and
Charles M. Jones
Michael J. Barclay
Affiliation:
Formerly of the Simon School of Business, University of Rochester, Box 270100, Rochester, NY 14627, died in a seaplane accident on August 16, 2007
Terrence Hendershott
Affiliation:
hender@haas.berkeley.edu, Haas School of Business, University of California, Berkeley, 545 Student Services Bldg #1900, Berkeley, CA 94720
Charles M. Jones
Affiliation:
cj88@columbia.edu, Graduate School of Business, Columbia University, 3022 Broadway, New York, NY 10027.
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Abstract

We show that the consolidation of orders is important for producing efficient prices, especially during times of high liquidity demand. The NYSE's centralized opening call market performs better than Nasdaq's decentralized opening process on typical trading days. The NYSE is much better than Nasdaq on witching days when index arbitrage activity subjects S&P 500 stocks to large, predictable, and mostly informationlessorder flow around quarterly futures contract expirations. Nasdaq opening price efficiency improves to NYSE levels once Nasdaq initiates a consolidated opening call in November 2004, but prices on the decentralized Nasdaq remain less efficient at other times of day.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 43 , Issue 1 , March 2008 , pp. 93 - 121
Copyright
Copyright © School of Business Administration, University of Washington 2008

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