Is There an Optimal Closing Mechanism?
62 Pages Posted: 1 Oct 2015
Date Written: April 10, 2015
We study the effects on market efficiency and integrity of introducing closing auctions in 20 exchanges around the world. We delineate two main categories of closing auction (those in which on-close orders can be entered through out the day, and those with a distinct end-of-day auction period) and examine four auction design features. We find that closing auctions significantly improve market quality, with on-close mechanisms providing the greatest benefits. Closing auctions tend to be more beneficial if they have randomized closing times, extensions if volatility thresholds are breached, prevent traders from altering their orders during the pre-close time, and do not display indicative closing prices.
Keywords: Closing Auction, Manipulation, auction design
JEL Classification: G14, G18, G38
Suggested Citation: Suggested Citation