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

Abstract

Closing auctions set daily closing prices for U.S. stocks and account for a striking 7.5% of daily volume in 2018, up from 3.1% in 2010. We study causes and implications of this major trend. Difference-in-difference analyses suggest that closing volume is fueled directly and indirectly by the growth of indexing and ETFs. Auctions usually match large volume cheaply on an absolute basis. However, auction prices almost never settle within the bid-ask spread, mostly due to the binding tick size, and auction price deviations revert quickly and completely.

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

JEL Classification: G11, G12, G14