Why Is the Bid Price Greater than the Ask? Price Discovery during the Nasdaq Pre-Opening

One fundamental issue in the study of market microstructures is that of price discovery. While most existing studies focus on the trading period, little is known whether and how much the non-trading period contributes to the price discovery. This paper offers a new perspective on the price discovery process by studying market makers' posting and revising of non-binding prices on Nasdaq during the one-and-half hours pre-opening period. We examine a unique data set containing all the market maker quotes and identifications collected for 50 of the most active Nasdaq stocks. Our empirical investigation shows there is strong evidence that non-binding prices contain information, and there is significant price discovery during the pre-opening period. In the absence of trades, Nasdaq dealers use locked market notes (e.g., the situation where the best bid price among all market makers is greater than the best ask) as an important device to indicate to other market makers which direction the price should move and what the opening price should be. Furthermore, we find evidence that there exists a leadership pattern among market makers, particularly for the most active stocks. Chaque matin avant l'ouverture du Nasdaq il y a une session durant laquelle les faiseurs de marché font des cotations sans exécutions d'ordres. Malgré le fait qu'il n'y a pas de transactions pendant cette période, il s'y produit une activité importante de soumission et de révision des cotations. Nous étudions l'information révélée par les cotations de prix d'achat et de vente. Notre banque de données contient l'identification des participants, ce qui nous permet de tester plusieurs hypothèses sur la dynamique de la formation du prix d'ouverture. Nous trouvons notamment que certains faiseurs de marché prennent un role de leaders.