Purpose – The purpose of this paper is to investigate the July 2007 introduction of a pre‐close call auction on the New Zealand stock market and its effect on share pricing quality and market manipulation. Design/methodology/approach – Market quality was tested using the methodology of Pagano and Schwartz, which is based on changes in market model R 2 s. Closing price manipulation is detected by comparing mean bid‐ask spread characteristics of the periods before and after the introduction of the pre‐close call auction. Findings – The closing call auction improves the quality of share pricing and reduces the incidence of market manipulation. Practical implications – The paper confirms the effectiveness of the changes made to the method of closing the market for all firms in the market. Originality/value – The paper extends knowledge of the effectiveness of closing call‐auctions. It is the first study in a low‐liquidity market and of shares with very low liquidities. Such markets have lower pricing quality and are more vulnerable to market manipulation. The study establishes the effectiveness of closing auctions in this environment.
Journal of Financial Regulation and Compliance – Emerald Publishing
Published: Feb 17, 2012
Keywords: New Zealand; Stock markets; Share prices; Pre‐close; Market manipulation; Market quality; Closing price; Call auction; Pricing efficiency