Closing Auction

A closing auction is a trading session held by a stock exchange at the end of the day, in which buy and sell orders are gathered over a short period and then executed together at one price. That price becomes the official closing price of each security. Most major equity markets end the day this way. It is also known as closing price auction.

The closing auction is one of the two regular call auctions in a trading day, the other being the opening auction. Between them, shares trade in continuous trading, where orders are matched one by one as they arrive. An auction concentrates liquidity at a single moment and produces one price for all participants, which makes it harder to distort and more representative than the last trade of the continuous session. The general mechanism is described under auction market.

The session has three parts. First, continuous trading stops and the call phase begins. Participants may enter, amend and cancel orders, but nothing is executed. Orders can be market orders, to trade at whatever the auction price turns out to be, or limit orders with a maximum buying or minimum selling price; see market order and limit order. Orders left over from the continuous order book usually take part as well.

Second, the exchange publishes information during the call phase so that participants can respond. This typically includes the indicative price at which the auction would currently clear, the volume that would trade and any imbalance between buying and selling interest. An imbalance attracts orders on the other side, which is how the auction draws in liquidity.

Third, at the end of the call phase the exchange runs the uncrossing. The algorithm selects the price at which the largest volume can be executed. All orders at or better than the auction price are filled at that price, with time priority deciding among orders at the limit.

Details differ by venue. On the London Stock Exchange, the closing auction call begins at 4.30 pm and lasts five minutes, ending at a random moment within a short window so that participants cannot time last-second orders precisely. Other European exchanges follow a similar pattern at their own closing times. Many add a period after the uncrossing in which further trades can be made at the closing price.

In the United States, the listing exchanges run closing auctions at 4.00 pm using dedicated order types, market-on-close and limit-on-close, which must be submitted before a cut-off, after which only orders that offset the published imbalance are accepted.

Exchanges protect the auction with safeguards. If the indicative price moves too far from a reference, the call phase is extended, in the same way as a volatility interruption. If no auction price can be formed, the closing price falls back to the last trade or another defined reference.

The closing price is the most widely used reference price in finance. It is used to calculate the net asset value (NAV) of a mutual fund and of exchange-traded funds, to value portfolios and derivatives positions, to compute margin, and to determine the level of every stock market index. Performance of asset managers is measured against a benchmark index valued at closing prices.

For this reason, investors who track an index want to trade at the close itself. A fund that buys at the closing price has no tracking difference from the index on that trade, whereas trading earlier in the day would create a gap. When an index changes its membership or weights, the adjustment takes effect at the close, and index funds execute the necessary trades in that auction.

The share of daily turnover executed in closing auctions has risen markedly since the 2010s, in both Europe and the United States, and now accounts for a substantial part of volume on many exchanges. Several forces lie behind this. Assets in index-tracking funds have grown. Best execution analysis favours a transparent benchmark price. Liquidity attracts liquidity: as more volume gathers at the close, large orders can be executed there with less market impact, which draws further orders away from the continuous session.

The concentration of trading at the close has drawbacks. Liquidity during the day becomes thinner, which can make intraday prices less reliable and continuous trading more expensive. The market becomes more dependent on a single event operated by a single venue: a technical failure during the closing auction can leave the market without an official closing price.

Because so much depends on it, the closing price is a target for manipulation. Placing orders late in the session to push the close up or down, known as marking the close, is prohibited under market abuse rules, and exchanges and regulators monitor auction activity closely. The randomised end, the published imbalance data and price collars all serve partly to make such conduct harder and to protect price discovery.