Dual Trading and Price Discovery at Market Close: Theory and Evidence

64 Pages Posted: 9 Nov 2020 Last revised: 20 Dec 2022

See all articles by Jingxiong Hu

Jingxiong Hu

Northwestern University

Canyao Liu

Yale University

Jiaheng Yu

Massachusetts Institute of Technology (MIT)

Date Written: November 18, 2021

Abstract

Investment banks like Goldman Sachs started to offer "guaranteed close" that executes orders for investors at close prices set on the primary exchanges. A volume of about 30% of the close auction volume was executed through this venue in recent years. Using a quasi-experimental shock -- NYSE fee cut in January 2018, we find that "guaranteed close" improves the informativeness of close prices. This finding cannot be explained by existing theories. We develop a model with two trading venues – the exchange and a bank, executing orders at the same price, where dual trading of the bank improves price discovery. The implications of our model apply generally to scenarios where brokers trade on order flow information.

Keywords: Price discovery, close price, dual trading, fee competition

JEL Classification: G14, G23

Suggested Citation

Hu, Jingxiong and Liu, Canyao and Yu, Jiaheng, Dual Trading and Price Discovery at Market Close: Theory and Evidence (November 18, 2021). Available at SSRN: https://ssrn.com/abstract=3692785 or http://dx.doi.org/10.2139/ssrn.3692785

Jingxiong Hu

Northwestern University ( email )

Evanston, IL
United States

Canyao Liu

Yale University ( email )

New Haven, CT 06520
United States

Jiaheng Yu (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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