LSE opening auction inefficient, says study

The London Stock Exchange’s opening price mechanism regularly fails to set efficient prices, researchers have found.

Academics found the LSE’s opening ‘call auction’ often fails to correctly price more than 80% of the most traded stocks in the market.

Detailed analysis

Researchers analysed close to 74 million individual trades of the top 100 stocks - the FTSE 100 - during a 12 month period between 2012 and 2013.

The combined FTSE 100 stocks in the sample average a total trading value of more than £21.54 billion and 290,000 transactions per day.

During the ten minute window between the call auction starting at 7.50am, and the market opening at 8am, the research also found a significant lull in trading activity for the majority of stocks.

Only in the last 60 seconds of the window was significant activity observed.

Dr Gbenga Ibikunle, Lecturer in Financial Markets at the University's Business School, led the research.

Our study suggests the influence of the call auction may have been exaggerated and oversold to investors by trading platforms eager to please the market. In an era when high frequency trading is pre-eminent and both independent and institutional traders are able to access information easily, it may be time for the LSE to reconsider its price-setting mechanism.

Dr Gbenga IbikunleUniversity of Edinburgh Business School