How Should We Ring the Closing Bell? Determining Optimal Closing Auction Design

Abstract

We examine how stock market closing price mechanisms affect liquidity, price ef- ficiency, and market integrity. Using hand-collected data on every major mechanism change in 45 markets during 17 years, we find that replacing simple mechanisms such as the last traded price with a closing auction typically improves market quality. However, auction design substantially impacts auction effectiveness – price stabilization features and randomized closing times are beneficial, whereas transparent indicative closing prices are often detrimental. The effects vary with the level of market development and liquidity, suggesting that when designing optimal closing mechanisms, there is no “one size fits all”.

Keywords: Closing Auction, Auction Design, Market Quality, Market Integrity