Strategic Behavior and Price Discovery.

We analyze the effects of strategic behavior by a large informed trader in a price discovery process used in opening auctions in continuous trading systems. It is found that the large informed trader manipulates the market using a contrarian strategy to neutralize the effect of the trades of competitive informed agents. Furthermore, consistent with the empirical evidence available, we find that information revelation accelerates close to the opening, that the market price approaches but does not converge to the fundamental value, and that the expected trading volume displays a U-shaped pattern. Copyright 2001 by the RAND Corporation.