The daily closing auction on stock exchanges has always been a vital part of the trading day. Fund managers and traders rely on that final five minutes to set closing prices, which are used to value portfolios or calculate indices.
But the rise of passive investing and trading algorithms is amplifying this final surge of activity, creating a shift in the rhythm of daily trading on stock markets in Europe.
The proportion of each day’s dealings that is done in these closing auctions rose to a record 25 per cent in the final quarter of 2019, up from about 17 per cent in the first quarte.
That average hides some extremes. French regulator AMF, for example, found last June that 41 per cent of trading volumes of CAC 40 stocks happened during the closing auction on Euronext Paris.
There is, in other words, a big lunge for the finishing tape. If the trend is unchecked, within eight years closing auctions could reach 50 per cent of all European daily trading activity, said Rebecca Healey, head of Emea market structure and strategy at Liquidnet.
Relying on each country’s primary exchange to calculate the closing prices on which billions of dollars are pegged, during this frenetic final period, is a clear operational weak point in the market. Now Esma, the European securities regulator, is consulting on whether it needs to take action.
The bigger picture is that equities trading volumes are depressed. Central banks’ efforts to reduce market volatility are working, and geopolitical threats have sapped investors’ enthusiasm for making big macro bets. Credit Suisse estimates that Europe’s average daily volumes fell 18 per cent between 2018 and 2019.
The greater concentration in the closing auction means fewer opportunities for an active fund manager who wants to trade as soon as possible during the day, and risks for brokers and market makers who do not want to be left holding the unsold portion of a client’s trade overnight.
It also creates potential pricing issues in the market, as trading desks readjust their books the next morning to account for the unexpected prices that auctions can produce.