This paper examines price efficiency responding to the new rule posted by the Taiwan Stock Exchange (TSE), effective on 2/20/2012. To improve price efficiency, TSE has revised the rule of the closing session, starting from five minutes before the close, wherein real trades are replaced with a sequence of simulated call auctions. The best quotes and the indicative trading prices are disseminated on line, instead of “trading in dark” as before. If a stock’s final simulated price deviates from the previous trading price by 3.5%, the stock’s final auction will be postponed by two minutes. Evidence shows that the rising transparency overall improves price efficiency by lowering price volatility. More importantly, the improvement varies with firm size. That for small- and medium-cap stocks is more pronounced than that for large-cap stocks, tightly linked to the index futures. No obvious expiration-day effect on large-cap stocks exists; and price manipulations on them shift ahead of the closing session.
