The switch from continuous to call auction trading in response to a large intraday price movement
Abstract:Some European exchanges (e.g. Euronext, Frankfurt and Madrid) make use of a mechanism to moderate price volatility that was proposed by Madhavan (1992) as preferable to a trading halt in times of market stress. It consists of a temporary switch from continuous to call auction trading in an individual security whenever its price moves beyond predetermined limits. This article studies whether this mechanism sharpens the information content of prices, dampens volatility and normalizes trading volume and intensity. Taking intraday data for the Madrid order driven continuous market, I find post switch improvements in the information content of prices and reductions in volatility, especially for thinly traded stocks. Trading volume and intensity peaked around auctions, but soon returned to preevent levels.
Document Type: Research Article
Affiliations: Department of Economics,Universidad de Santiago de Compostela, Santiago de Compostela, Spain
Publication date: March 1, 2012