Vestigial Tails: Floor Brokers at the Close in Modern Electronic Markets

66 Pages Posted: 28 May 2020

See all articles by Edwin Hu

Edwin Hu

New York University School of Law

Dermot Murphy

University of Illinois at Chicago - Department of Finance

Date Written: May 13, 2020

Abstract

Closing auctions determine daily closing prices and trillions of dollars of net asset values. We study closing auction market quality on NYSE and Nasdaq as measured by the accuracy of indicative closing auction prices, volume, and order imbalances. Closing auction market quality is significantly lower on NYSE compared to Nasdaq due to the existence of a second-stage auction period on NYSE which is exclusive to floor brokers. When NYSE closes its floor during the COVID-19 pandemic, we find that NYSE auction quality improves. We use exogenous shocks to impatient liquidity trader volume stemming from end-of-month portfolio rebalancing periods and "triple witching" days to show that closing auction market quality is worse on NYSE because impatient liquidity traders pool their orders in the first-stage auction period. Consistent with this view, NYSE auction quality deteriorates during our 2011-2018 sample period as passive investing overtakes active management.

Keywords: closing auctions, floor brokers, D-Orders, COVID-19

JEL Classification: G12, G14, D44

Suggested Citation

Hu, Edwin and Murphy, Dermot, Vestigial Tails: Floor Brokers at the Close in Modern Electronic Markets (May 13, 2020). Available at SSRN: https://ssrn.com/abstract=3600230 or http://dx.doi.org/10.2139/ssrn.3600230

Edwin Hu

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Dermot Murphy (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
312-355-4372 (Phone)

HOME PAGE: http://sites.google.com/site/murphyderm

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