The Information Content of Market-on-Close Imbalances, the Specialist and NYSE Equity Prices

Abstract

We examine the relationship between announcements of (a) market-on-close orders, (b) the price dynamics and (c) specialist trading on the New York Stock Exchange. We find that the closing order imbalance affects prices even prior to the announcement of the imbalance. This is consistent with investors expressing their demands through both market-on-close orders and direct purchases - so that some of the price impact could occur before the specialist's announcement of the imbalance. However, the specialist himself is trading prior to the announcement, which also helps explain why at least some of the price movement occurs before the dissemination of the imbalances. Consequently, the remaining investors are actually trading /against/ the direction of their closing imbalances and the specialist is /not/ helping to smooth investor demands. Because of the structure of the mechanism and the volatility of prices near the close (which is especially elevated at the deadline for market on close orders at 3:40 p.m.), this is an interesting context for studying how information gets reflected in price.

Keywords: Market-on-Close Imbalances, Specialist, Closing Prices

JEL Classification: G10, G20