Do Volatility Extensions Improve the Quality of Closing Call Auctions?

Abstract

To improve the efficiency of the closing price, many equity exchanges apply volatility extensions to their closing call auctions. If an imminent auction execution implies a large price change, the order submission period is extended to let traders reconsider their orders. This paper uses the introduction of closing auction volatility extensions at NASDAQ Nordic to provide the first analysis of the effects of such mechanisms. We find that the volatility extensions reduce transitory volatility and deter price manipulation at the close. Consistent with increased trust in the mechanism, the closing call auction attracts higher volumes after the change.

Keywords: batch auction, auction safeguard, price manipulation, market integrity

JEL Classification: G14, G15, G18