Price discovery during parallel stocks and options preopening: Information distortion and hints of manipulation

Many exchanges act to prevent manipulative orders from distorting informative price discovery during stock and options’ markets preopening. Most preopening sessions run in parallel: indicative book-based stock prices alongside traded index options, whose underlying asset is the indicative index. Lead-lag patterns between the options-implied and the indicative indexes may point to differences in informational efficiency and/or manipulated prices. With three regulatory events throughout our sample, serving as natural experiments, we explore price discovery properties in both markets. We find significant lead-lag, price reversal, and order cancellation patterns similar to those predicted by theoretical models of manipulation, together with informational inefficiencies.