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Essays on the Microstructure of the Market Pre-opening Period

The University of Manchester, Manchester, UK
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  • Market Microstructure
  • Market Pre-Opening Period
  • Liquidity
  • Order Submission Intensity
  • Order Submission Aggressiveness
  • Stock Market Price Discovery
  • Return Determination
  • Limit Order Book Information


This thesis consists of three related essays that examine investors‟ order submission strategies during the pre-opening period on the Malta Stock Exchange. The pre-opening is a period of liquidity formation and price discovery characterised by the absence of trade execution. The three essays collectively examine the information content of the order book in relation to: the intensity of order submissions, the aggressiveness of investors‟ order placement strategy and the determination of returns generated over the pre-opening period.The first essay empirically investigates if public information concerning the current state of the order book impacts the duration between order arrivals. Utilizing an augmented ACD model, the research reveals that the information which can be inferred from the characteristics of incoming orders has a more significant impact on the intensity of buy order submissions as compared to sell order submissions during the pre-opening period. Furthermore, prospective buyers appear to be more responsive to liquidity provided by the sell side than the reverse. Locked or crossed order submissions tend to increases (decreases) the intensity of order flow on the own (opposite) side of the order book, corroborating Cao et al. (2000) that such order-types contain informative signals about the fundamental value of the asset.The second essay analyses the impact of limit order book information on the aggressiveness observed in the submission, revision and cancellation of limit orders during the market pre-opening period. The empirical results indicate that the aggressiveness of order submissions and forward price revisions react both to the existing and subsequent changes in the execution probability at market opening, driven in part by the depth on either side of the order book. The aggressiveness of order cancellations increases on both sides of the order book when the depth at the top of the ask order book increases. In addition, the results suggest that the order book height and size of the inside spread impacts the aggressiveness of order submissions, revisions and cancellations.The third essay studies the contribution of the pre-opening period to the daily price discovery process and the factors that impact the return generated over this period. The results indicate that approximately one third of daily price discovery occurs in the pre-opening period. In addition, the impact of relative depth and height of the overnight and opening order book are concentrated at the top of the order book. Furthermore, cumulative changes to relative depth attributable to order submissions most significantly impact the opening returns of less actively traded stocks. The results show a strong relationship between opening returns and cumulative changes in the relative height along the order book attributable to order submissions, cancellations and forward and backward price revisions over the pre-opening period.

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