The Role of Pre-Opening Mechanisms in Fragmented Markets

To facilitate price discovery, Euronext Paris has always relied on a transparent pre-opening phase and on a call auction to open continuous markets. Fast trading, competition from alternative trading venues and the poor volume at the open (2%), however, call into question the role of these non-trading sessions. Using a unique dataset of stocks cross-traded on Euronext Paris, BATS and Chi-X, we explore the behaviour of traders during the preopen based on their speed and nature of orders (proprietary, agency or market-making). We show that slow brokers submit orders very early, and most of them are executed within the day. Fast prop traders or dedicated liquidity providers, by contrast, only participate in the last half-hour. Interestingly the pre-opening activity of slow brokers is strongly related to the price discovery process across trading venues. Finally, we show that although tentative clearing prices of the preopen contain information, they are followed by a reversal in the following 15 minutes across the different platforms, reflecting price pressure and liquidity issues related to the opening phase.