Pages: 54
Publication: 25 January 2021
Authors: Paul Besson, Head of Quantitative Research and Raphael Fernandez, Quant Research Analyst
Strong rise in the market share of closing auctions
The strong rise in the market share of closing auctions observed from 2008 to 2020 has attracted much interest from market participants, as well as from regulators and academics.
While most commentators attribute this rise to the growing share of ETFs, very few publicly available research papers study the market impact of trades executed at the Close.
As best execution enforcement strengthens across all investor types, we believe that the cost of trading at the Close is a key driver in understanding the strong increase in closing auction market share. We also believe that the recent growing popularity of alternative mechanisms for trading on Close raises new systemic questions concerning the quality of the prices in closing auctions.
The TRADE Roundtable discussing trading at close
Listen to this roundtable in four parts organised by The TRADE News where Euronext’s Paul Besson and other experts at Sell-Side and Buy-Side firms discuss trading at close.
- The key drivers of growth for rising volumes at the Close
- Implicit and explicit costs for trading at the Close in comparison with the Continuous markets
- Impacts of the migration to the Close on the Continuous trading day
- And how institutional investors can navigate these changing liquidity patterns
The Euronext Quant Research report on trading at close
In 2020, closing auctions market share represented more than 20% of European consolidated volumes. Surprisingly, almost no publicly available market impact model on closing auctions is available, although the continuous market impact has been extensively studied. As a market operator we share with all market participants the findings of our unique dataset. In particular we evidence four main results on closing auctions:
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We highlight that indicative prices overreact on average during Call phases and that this pattern is explained by the temporal imbalances of Market and Limit orders (see Figure 13, p13 and Figure 16, p15 of report).
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We describe the instantaneous impact and its subsequent decay following a Market order submission (see Figure 19, p18). We show that early order submissions have less price impact than later submissions (see Figure 23, p21 of report).
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We establish a market impact model on Close for Market orders. We show that for a given trade size, the resulting market impact on Close is two to three times smaller than it is for continuous trading (see Figure 25, p26 and Figure 26, p27 of report). This comes as no surprise as the Close represents the most liquid event in equity markets.
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Lastly we raise the question of the internalisation of Market orders and its adverse consequences on auction volatility, as shown by the increasing standard deviation of the Jump on Close when the share of matched Market orders decreases (see Figure 30, p31 and Figure 32, p32 of report)
Euronext Quantative Research report
Download Better trading at the close thanks to market impact models
Euronext Market Insights webinar about trading at the close
The focus is on Quantitative answers to key questions on trading at the closing auction on Euronext Equity:
- Are closing auctions a cheaper way to trade large orders compared to continuous trading?
- Is earlier sending of Market Orders beneficial to reduce the market impact on close?
- Is the internalisation of On Close Market Orders detrimental to auction volatility?