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Rev Fin 2000; 13:627-658
© 2000 the Society for Financial Studies

Article

Price discovery in auction markets: a look inside the black box

A Madhavan and V Panchapagesan1
University of Southern California, USA
1 Washington University in St Louis, USA
Correspondence to: V Panchapagesan, Olin School of Business, Washington University in St Louis, One Brookings Drive, St Louis, MO 63130, USA
e-mail: panchapagesan@olin.wustl.du

Abstract

Opening mechanisms play a crucial role in information aggregation following the overnight nontrading period. This article examines the process of price discovery at the New York Stock Exchange single-price opening auction. We develop a theoretical model to explain the determinants of the opening price and test the model using order-level data. We show that the presence of designated dealers facilitates price discovery relative to a fully automated call auction market. This is consistent with specialists extracting information from observing the evolution of the limit order book. In addition, the specialist's opening trade reflects noninformational factors such as price stabilization requirements.


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