[ I N - D E P T H
and Deutsche Börse, the industry
has seen other operators bring
forth new functionality, order types
and mechanisms in a bid to intro-
duce greater competition in the
space, while helping market par-
ticipants engage and interact with
the increasingly crucial liquidity at
the close.
Key driver
It’s important to note that the
amount of total volume in closing
auctions is not increasing, but the
percentage of total volume has
increased dramatically. This has
sparked concern from some senior
traders, particularly those among
active buy-side firms, who largely
agree that trading during the day
has become more difficult as a
result.
“This shift has been driven by
passive exchange traded funds
(ETFs) and index tracking volumes
aiming to benchmark at the close.
These funds just need to achieve
the closing price for valuation pur-
poses with creations and redemp-
tions,” says Daniel Nicholls, head
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C L O S I N G
A U C T I O N S ]
of trading at Hermes Investment
Management. “It is not unusual
for stocks to spike in the closing
auction then reopen the next day at
the previous level last seen in con-
tinuous trading. This isn’t healthy,
as it isn’t a reflection of where
valuations have been throughout
the trading day.
“If real volume continues to shift
to the close, what will be left in
continuous trading? We could see
increased toxic market making and
front running by high-frequency
trading (HFT) firms. The amount
of negative reversion has already
increased significantly due to the
lack of liquidity during continuous
trading.”
Market commentators generally
agree that the shift from active
to passive investing and ETFs
has been a key driver of the move
towards the close. The closing auc-
tions are used by active funds, but
for passive funds that track major
benchmarks, trading in closing
auctions is imperative in acquiring
that closing price.
Alasdair Haynes, CEO and
Issue 62 // TheTradeNews.com // 51