Trading @ The Close

Abstract

Closing auction activity and index investing have grown substantially in global equity markets. Examining call auctions in Europe, we show increases in auction activity are not explained by index investing. Elevated auction activity, especially on index rebalance days, contributes to large auction returns from the last continuous trade price. These returns are permanent in liquid stocks. In less liquid stocks only a small fraction of the return is reversed the next day. These results demonstrate closing auctions are important price discovery events. We find no evidence that increases in auction activity harm market quality during continuous trading.

Keywords: closing auction, liquidity, efficiency

JEL Classification: G10, G20, G24, D40