Who Trades at the Close? Implications for Price Discovery, Liquidity, and Disagreement

Abstract

We document the growing importance of the closing auction in the U.S. equity market and study its causes and implications. The closing auction accounts for a striking 7.5% of daily volume in 2018, up from 3.1% in 2010. The growth of indexing and ETFs shifts trading towards the close and distorts closing prices: they often deviate from closing quote midpoints, but the deviations revert by half shortly after the close and fully overnight. As volume migrates towards the close, liquidity at the open deteriorates. Finally, we introduce a novel measure of investor disagreement, the ratio of auction-to-total volume, and show that higher disagreement positively predicts future stock returns.

Keywords: Closing auction, passive investing, price pressure, liquidity, investor disagreement

JEL Classification: G11, G12, G14