Most modern markets use auctions 

If we look at closing mechanisms over time, we see that just 30 years ago it was most common to use the last traded price!

A lot has changed in 30 years. Most markets went from open outcry to electronic during the 1990s, the U.S. markets adopted decimal prices, index funds and program trading was created, and volumes exploded.

So, it’s really not surprising that the way markets close has also changed. 

In the chart below, we start with data from an academic study. It shows that by 2014, most markets were already using standalone auctions to aggregate large volumes of trades, match them all together and set official closing prices.

We updated this data for a sample of more recent years using a slightly different approach (grey box in the chart below for 2018 onwards, where we also separate WAP and last trades). 

We see that the trends of modernization continue. However, with a broader universe, we also see that some countries use weighted-average price auctions. We would highlight that these are used in smaller and less liquid markets and are also in decline.

Chart 4: Markets have evolved from “last trade” to mostly using auctions for close

Why don’t North American markets rely on auctions alone at the close

One important difference between European and North American markets can be seen in the chart below.

• When Asian and European markets close, there is other liquidity available in other countries.
• At the end of North American trading, there is a period where no markets are open, making liquidity harder to source and price.

This makes it much easier to hedge unexpected imbalances that arise in the auctions in Europe and Asia than in the U.S. market.

However, we should also highlight that U.S. stocks and futures markets do still trade after the official close at 4 p.m. Eastern Time.

Chart 5: European markets are mostly use auctions; North America uses on-close

The overlap with continuous trading and the close auction book-build is designed to be able to access some of the end-of-day liquidity to hedge the close. 

In studies we’ve done, we see that the market reacts immediately to imbalance messages, which the close auction book-build shares. Prices rise (for buy imbalances) and fall (for sell imbalances) – in proportion to the size of the imbalance (line thickness). 

Chart 6: MOC volatility in the U.S. is generally pretty low thanks to trading into the close

Some consider this information leakage detrimental to those trying to execute at the close as it gives other traders a chance to profit from the trades in the close book.

However, as the chart above shows, even for large imbalances, the overall impact or “leakage” from the imbalance announcement is less than 15 basis points. In addition, the difference between the last trade price (red or blue line) and the actual close (parallel grey lines of the same thickness) is, on average, a fraction of that. 

In short, the on-close facilities bring additional liquidity into the close – at a pretty cheap price (for liquidity) and a small average profit.

Other ways to reduce volatility  

Issuers and investors typically lose when large trades cause prices to move dramatically into the close. There are a couple of interesting ways different markets try to offset that use:

1. Order types that only offset imbalances: From market orders that only trade on the “opposite” side of the auction book imbalance to limit orders that offset adverse price moves caused by imbalance selling (limit buys) or imbalance buying (limit sells).
2. Extension period: To focus more attention and liquidity on the stocks that did not originally have an “orderly” close.
3. Random closes: Make it harder for traders to add or cancel large trades at the very last minute, giving investors and arbitrageurs time to offset excessive market impact.

Chart 7: Some closes use collars to stop prices moving “too far” in the close

Another important feature of the close is the way it aggregates all orders into one book, which helps to minimize impact and ensure all investors get the same price.

If closes were fragmented like live trading often is, there would be multiple clearing prices depending on which venue orders rested in. This is a problem for investors as they are the marginal demand and supply. 

That means that the market with more buyers clears at a higher price, while the market with more sellers will clear at a lower price. That leaves investors, as a whole, receiving worse prices than they would in a consolidated books.

In continuous markets, these costs are small, as arbitrage can occur between venues.  

Auction markets happen instantly. That leaves no time to hedge or send new orders. As a result, market makers run execution and position risks – and liquidity costs would rise. 

Chart 8: Multiple closes would most likely hurt investors

As markets change, closes continue to evolve 

The trends we see in Chart 4 are far from over. Even markets that have long adopted a specific kind of close regularly reoptimize the rules. For example: 

• In 2016, the Hong Kong exchange moved from a time weighted-average Price (WAP) style close to an auction, in conjunction with a new volatility control mechanism.
• In 2019, Nasdaq delayed the cutoff to enter orders but also introduced late LOCs (limit orders that could be entered even later) as a way to reduce leakage and still offset unexpected price moves.
• In 2021, Toronto changed how the Canadian market close works, making it more similar to U.S. models

Close has always been important — to investors, academics and traders.

It's earned a market structure all of its own.