News at the Bell and a Level Playing Field

Danqi Hu
Guanghua School of Management, Peking University; Northwestern University - Kellogg School of Management

Andrew Stephan
University of Colorado at Boulder Leeds School of Business

Abstract

The paper provides initial evidence that stock exchange procedures around closing auctions advantage speed traders at the expense of auction participants. The authors show that 4:00 pm earnings releases result in informed trading in the continuous regular-hour session in the short window between 4:00 pm and the closing auction; this trading subsequently moves closing prices in the direction of the earnings news. The ability of speed traders to submit 4:00 pm-news orders to the auction through the continuous session earns them up to 1.5% profit and creates an unlevel playing field because most auction participants are not allowed to cancel their orders. Furthermore, firms with higher institutional ownership are more likely to voluntarily delay their earnings announcements to after market close once they become aware of this pre-close activity. The study has implications regarding the timing of information releases, trading halts during auctions, and the design of the closing process.

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News at the Bell and a Level Playing Field

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