SAFE Working Paper No. 144

High Frequency Traders without Trading: Price Discovery and Liquidity Provision in the Pre-Opening Period

High-frequency traders (HFTs) contribute significantly to price discovery in the pre-opening

period, and liquidity provision in the opening auction, on the Tokyo Stock Exchange (TSE),

even though there is no trade in this period. We use a change in market design by the

TSE (known as \Arrowhead") as a natural experiment in the time-series dimension of a

positive shock to HFT activity. Similarly, in the cross-sectional dimension, we use the

activity of HFTs during the pre-opening period. We conclude, based on these two analyses, that more effcient price discovery during the pre-opening period is associated with greater

HFT activity.