Jour Fixe - The Impact of High Closing Auction Volumes on Market Quality and Price Discovery

The Impact of High Closing Auction Volumes on Market Quality and Price Discovery (joint with Benjamin Clapham and Benedikt Schwemmlein)

Due to the rise in passive investments and regulatory changes, equity markets worldwide have witnessed substantial increases of trading activity in closing auctions. Based on three major European markets, where closing auctions account for more than one third of daily trading volume, we analyze whether these high closing auction volumes have negative implications for market quality during continuous trading and price discovery at the close. Due to the shift of trading interest to the close, we find that trading activity and liquidity during continuous trading significantly decrease with higher closing auction volumes. This effect is particularly strong for the last thirty minutes of continuous trading. Moreover, we find evidence for distortions of the closing price because 23% of the closing auction return are systematically reversed over night.