The Effects of a Transparency Change in the PreopeningSession on Price discovery

Abstract

This paper examines how price discovery efficiency is affected by changes in the pre-trade transparency level on the Korea Exchange (KRX) on October 6, 2003. The preopening session on the KRX has experienced three policy changes related to pre-trade transparency of the open limit order book. We find that KRX stocks composing the KOSPI200 index have significant price learning about 10 minutes before the opening. We document that the transparency level change has reduced informed traders’ participation in the preopening, but has enhanced the information transfer efficiency for uninformed traders. The information loss from the decreased informed participation is canceled out by the increased information transfer efficiency for the uninformed. The total amount of market price discovery shows no significant difference after the transparency change. Overall, we conclude that the pre-trade transparency level change did not increase preopening informativeness of the intrinsic price.