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For a stock, the market touch is the difference between the best bid and ask price.
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allow dealers to step in for very large trades, as discussed in Section 5.1.2.
Note that the coexistence of a limit order book and market making mechanisms for large trades
gives investors the possibility of choosing between trading patiently by working an order in the
limit order book or trading immediately off the limit order book, at principals prices. As
investors pay more and more attention to execution costs, they are likely to base their choice on
the relative costs of the two trading procedures.
Liquidity
The use of electronic call markets and/or dealers in small-capitalization stocks can be seen as a
way to enhance the liquidity of these securities.
Electronic call markets have several advantages. First their operating costs are low. Second, in
thin markets, by aggregating a large number of orders, a sequence of call auctions results in
lower price variability than in a continuous auction (see Garbade and Silber (1979), Pagano and
Röell (1990)). This reduces the deviations between the fundamental value of the asset and
transaction prices. In this way, call auctions result in lower execution costs.
There are at least three benefits to the presence of dealers in small-capitalization stock markets.
First, they can provide immediacy in between call auctions and additional liquidity in
continuous market. Second, they can, and are indeed often required to, complement the supply
of liquidity at the time of the call auctions. Finally, they also play a role as sponsors of small
stocks, either because they have an obligation or incentives35 to produce information on the
stocks in which they make the market.
Price Discovery
Call markets are frequently used to open the market. One possible reason is that they better
aggregate information and thus facilitate price discovery in subsequent continuous trading. Price
discovery is particularly important and difficult when the market opens because of uncertainty
concerning the asset valuation following the overnight trading interruption. Biais, Hillion and
Spatt (1995) provide an empirical analysis of the pre-trading phase before the market opening in
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In the Nouveau Marché , the dealers ( Introducteurs Teneur de Marché) must provide information on stocks in
which they make the market. Angel (1997) argues that large spreads on Nasdaq provide dealers with incentives to
promote stocks in which they make the market.
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the Paris Bourse. They find empirical evidence that price discovery occurs during the pre-
trading phase, especially toward the end of this phase. This result supports the view that a pre-
trading phase and the call auction contribute to informational efficiency36.
5.2. Remaining differences between European exchanges.
There are four main important differences that remain between European exchanges:
(i) Trading systems do not reach the same level of consolidation of the order flow.
(ii) The obligations and the privileges of dealers differ in each system.
(iii) Pre-trade transparency and Post-trade transparency differ between exchanges.
(iv) Clearing and settlement procedures are not standardized.
5.2.1 Consolidation of the order flow
Exchanges have not reached the same degree of consolidation of the order flow (see Table 5)
yet. With this respect, we can distinguish three groups of exchanges. In the first group, which
includes the Paris Bourse and the Swiss exchange, the order flow is highly centralized and price
links between on and off-system trades are enforced. In the Amsterdam Stock Exchange, the
order flow is centralized but there are no formal price links between on and off-system trades.
Finally the third group, which includes the London Stock Exchange and Deutsche Börse, is
characterized by a fragmentation of the order flow.
NSC concentrates more than 90% of the turnover value (source: Paris Bourse). The order flow is
also highly centralized in Switzerland since SWX concentrates 80% of the turnover value37.
Moreover, in these exchanges, links between transaction prices and order book prices are
enforced. In NSC, block trades for the most liquid stocks (approximately 90 stocks) can be
conducted away from NSC. However, block trade prices must be at or within the Weighted
Average Spread38 computed for each stock. The Swiss Exchange enforces the Best Execution
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Madhavan and Penchapagesan (1998) also study theoretically and empirically price discovery at the opening of
the NYSE. They show that the specialist in the NYSE contributes to price discovery at the opening.
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