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.
