Should We Use Closing Prices? Institutional Price Pressure at the Close

Abstract

The closing stock price is determined in a special call auction. This single trade accounts for 7.3% of daily volume in 2018 and is strongly associated with ETF ownership and institutional rebalancing. Strikingly, this huge volume contributes little to price discovery. Closing prices frequently and significantly deviate from closing quote midpoints, but these deviations on average fully revert overnight. Half of the reversal occurs shortly after the close. These price deviations matter for ETF mispricing and put-call parity violations and their ability to predict next-day stock returns. Finally, closing-to-total daily volume negatively predicts future stock returns. Our results raise concerns about an overwhelming reliance on closing prices.

Keywords: closing price, closing auction, price efficiency, institutional trading

JEL Classification: G11, G12, G14