The role of closing auctions in well-functioning markets

Abstract

The growth in volume share at the close of the trading day has been well documented in the literature. Beyond their positive contribution to end-of-day price discovery, closing auctions have become significant liquidity events. We present several factors that have contributed to the volume growth, arguing that it is structural and not limited to the commonly cited growth in ‘passive’ investing. In our view, well-designed closing auctions attract natural liquidity and contribute to efficient price discovery. In this note, we discuss some of the key themes around closing auctions in terms of their impact on both global asset managers and the well-functioning of financial markets. We show that, amongst the different market designs, auctions have become more attractive for equities as the mix of market participants has evolved. We then argue that well-functioning closing auctions have certain defining characteristics, enabling the benchmarking of exchanges’ offerings globally. Lastly, we discuss the impact that the increase in closing auction volume has on broker product offerings. Our experience shows that the product offering is still evolving. We highlight some product aspects that would be beneficial to global asset managers.