Data Insights

NYSE Closing Auction: price discovery opportunities reach new highs

Published
August 29, 2024

Last year, we wrote about the importance of the NYSE Closing Auction and the flexibility it provides to investors in managing risk and market impact. A year later, the single largest liquidity event of the US trading day has become larger and more important than ever before. In this post, we revisit some of the shifting dynamics of the NYSE Closing Auction and examine the impact of recent changes to the auction mechanics.

A story of consistent growth

Over the last couple of years, closing auctions have not only reached new highs in terms of daily traded shares and notional, but have also reached their highest levels as a share of US equity markets’ consolidated volume and notional. In Q2 2024 closing auctions within the US equity markets matched $55.5bn per day and accounted for 9.44% of total notional value traded - both figures at record highs. This growth can largely be attributed to NYSE-listed trading, as the NYSE Closing Auction has increased by +1.39% to 10.52% as a share of total NYSE-listed trading volume.

In our last post we highlighted the increasing popularity of Closing D-Orders. Submitted exclusively through NYSE floor brokers, Closing D-Orders can interact with liquidity on either side of an imbalance with additional time for order entry and modification. Back then Closing D-Orders had just overtaken Market on Close (MOC) orders as the NYSE Closing Auction order type with the most executed volume for the first time since their introduction. As of August 2024, this lead has widened further and Closing D-Orders now account for over 46% of the NYSE Closing Auction executed volume, more than 8% higher than MOC orders.

At the end of 2022 the NYSE introduced new flexible connectivity options for Floor Brokers, allowing firms to design their own proprietary order management systems for their clients or use a new standardized solution. As of August 2024, over 55% of all Closing D-Order executed shares were submitted by floor brokers using these new connectivity options, while 4 out of every 10 Closing D-Orders were submitted in an MOC-like profile (i.e. marketable at all prices). Throughout this transition, order entry dynamics have remained relatively constant as market participants gradually adapt to this ever-changing and improving landscape.

More time leads to faster price discovery

Until August 9th, 2024, Closing D-Orders were included in the Closing Auction Imbalance information starting at 3:55 PM. In an effort to further boost transparency and provide greater opportunities to investors for more efficient price discovery, the NYSE moved this time threshold to 3:50 PM starting on August 12th, 2024.

The following chart illustrates the impact of this change on Closing D-Order order entry times. Prior to the change, less than 20% of entered Closing D-Orders were submitted before 3:50 PM. This figure has jumped to over 27% since the change, matching an order entry profile more typical of a rebalance or month-end auction event (‘special days’ in chart). Moreover, the share of Closing D-Orders submitted in the last 10 seconds of order entry (between 3:59:40 and 3:59:50) has decreased by 70bps during the same period. With Closing D-Order interest included in the Closing Auction Imbalance information at 3:50 PM, investors now have an additional five minutes of complete imbalance information to offset existing imbalances, leading to a reduced need for later order entry.

This is particularly evident when charting the second-by-second imbalance and paired notional of each symbol in the NYSE Closing Auction as a percentage of its closing auction matched notional (data on imbalance and paired notional is derived from the NYSE imbalance feed after 3:50 PM and from internal NYSE data before 3:50 PM). As seen in the following chart, investors have been very quick to react and adapt to the change by offsetting imbalances more gradually following the 3:50 PM imbalance dissemination and by increasing the paired notional at a much faster rate than before. The imbalance dissemination change has also greatly reduced the variability of both these measures previously seen at 3:55 PM, as the additional five minutes provide an enhanced price discovery experience for NYSE participants.