The NYSE closing auction is the busiest time in the US equity market trading day, when over 200 million shares are traded. The auction is a unique blend of sophisticated technology and human judgment that produces the day's most important price point for investors and listed companies. The smooth functioning of auctions is critical as market participants expect and rely on the close to provide a critical daily price point that reflects market interest.
Given the auction's importance, the NYSE places intense focus on its technology and process, and strives to ensure that all participants understand the tools available to facilitate trading in this critical event.
Here's a behind-the-scenes look at what happen during the NYSE Closing Auction:
Investors seeking to participate in the closing auction can participate in the same way they participate in trading throughout the day, by sending orders to their broker to act on their behalf to execute their orders. Investors can also direct their orders to a NYSE Floor Broker for execution in the close, just as they can at any point throughout the trading day. Floor Brokers can receive orders from their customers via voice or electronic communication, and enter their order via handheld device or using algorithms.
See our related post on D Orders for data and analysis of Closing D Order usage
Designated Market Makers (DMMs) have obligations to maintain fair and orderly markets and facilitate price discovery throughout the trading day, obligations that extend to the auctions. One of their obligations is to facilitate the closing auction process, which includes setting the closing price at a level that satisfies all interest that is willing to participate at a price better than the closing auction price, and supplying liquidity as needed to offset any remaining auction imbalances that exist at the closing bell.
There are several NYSE order types that can be used in the closing auction, with the most common being Market-On-Close (MOC) and Limit-On-Close (LOC) orders.
An MOC order is an unpriced order to buy or sell a security at the closing price and is guaranteed to receive an execution in the NYSE closing auction. An LOC order sets the maximum price an investor is willing to pay, or the minimum price for which an investor is willing to sell, in the closing auction. An LOC order priced better than the final closing auction price is guaranteed to receive an execution in the NYSE closing auction.
Because the NYSE is the only exchange with an open-outcry Trading Floor, it is also able to offer investors access to auctions via a Floor Broker. Floor Brokers are able to enter a customer's order orally to a DMM on the NYSE Trading Floor or via an electronic order, called a Closing D Order, which again is sent from the NYSE Trading Floor. Closing D Order are designed to replicate the Floor Broker's traditional face-to-face interaction, participating passively most of the day but also trading at more aggressive prices when contra-side liquidity is available.
The various order types described above are designed to allow maximum flexibility for investors choosing to participate in the auction. The different order types align with different events leading up to the auction.
|6:30 AM||MOC/LOC orders can be entered|
|2:00 PM||Imbalance information is published to Floor Brokers|
Cutoff for MOC and LOC order entry, modification, and cancellation
Imbalance dissemination begins
|3:55 PM||Imbalance dissemination begins including Closing D Orders at their discretionary price range|
|3:59:50 PM||Cutoff for Closing D Order entry, modification and cancellation|
|4:00 PM||Regular way trading ends and auction commences|
Beginning at 3:50 p.m., NYSE publicly disseminates closing auction order imbalance information. At 3:55 p.m., the NYSE includes Closing D Orders at their discretionary price range in the closing auction order imbalance information. This provides the market with information about the level of buyers and sellers in a particular security, and aims to give investors the opportunity to decide whether to participate in the last trade of the day. The information is published every five seconds (if the information changes) until 4.00 pm. Key data points include:
|Imbalance Side||Buy/sell direction of imbalance shares|
|Reference Price||Used to calculate Continuous Book Clearing Price (generally last sale)|
|Paired Quantity||Number of shares matched at the Reference Price|
|Continuous Book Clearing Price||Price where all better-priced orders on the side of the imbalance could be traded|
The growth in passive investing, along with the challenges of trading in a market with many exchanges and dark pools, has helped the NYSE closing auction grow to nearly 7% of NYSE-listed volume. This is roughly twice the share that auction commanded just five years ago. This is the case because investors and brokers acting on their behalf can see the benefit of participating at a time when the maximum amount of buyers and sellers are coming together.
Twenty years ago, trading shares in a company was a simple business. You could call a broker and they would buy or sell shares in a company on your behalf, sending the order to the listing market, either the New York Stock Exchange or Nasdaq, to get the best price.
NYSE Floor Brokers operate on an agency basis on behalf of institutional investors and broker-dealers, including market participants representing retail investor interest. Traditionally, Floor Brokers at the NYSE had substantial discretion and flexibility when representing customer orders manually on the trading floor.
NYSE is the only U.S equity exchange that uses a unique “parity/priority” allocation model that is designed to promote deep liquidity, and superior market quality.
NYSE rewards those who set the best price, then allocates the remaining shares to other orders that match that price — rather than simply executing trades based on who is next in the queue.