Non-Fundamental Information and Market-Makers’ Behavior during the NASDAQ Preopening Session

This paper examines whether NASDAQ dealers’ preopening quotes might be related to non-fundamental information, that is, information about transient trading pressure unrelated to fundamentals. Preopening quotes posted by wholesalers (dealers specialized in market-making and thus presumably more exposed to inventory risks) are strongly related to opening price reversals, a measure of transitory price pressure. Wholesalers are more likely to post preopening quotes on days characterized by large liquidity shocks or days following larger order imbalances, but not on days of strong informational asymmetry about fundamentals (days of analyst recommendation releases, earnings announcements or merger announcements). These patterns do not hold for other intermediaries, namely institutional brokers providing sell-side coverage. I also find that daily order imbalances (another trading pressure measure) are strongly related to the preopening activity of wholesalers but not to any other groups of market-makers with more diversified banking activities. Overall, I interpret this as evidence that non-fundamental information matters during the preopening session and impacts intermediaries’ preopening behavior.