The NYSE closing auction is the busiest time in the US equity market trading day, when around 223 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, verbally, or using algorithms.
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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. DMMs typically participate by offsetting 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.
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 verbally to a DMM on the NYSE trading floor or via an electronic order, called a d-Quote, which again is sent from the NYSE trading floor. d-Quotes are designed to replicate the floor broker’s traditional manual interaction, participating passively most of the day but also trading at more aggressive prices when contra-side liquidity is available.
Because d-Quotes are manually controlled orders, they offer additional flexibility over MOCs and LOCs which reside in the electronic order book.
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.
|Closing Auction Timeline|
|7:30 AM||MOC/LOC orders can be entered|
|2:00 PM||Imbalance information is published to floor brokers|
|3:45 PM||Cutoff for MOC and LOC order entry and modification|
Imbalance dissemination begins
|3:55 PM||Imbalance dissemination, including d-quotes and other e-quotes eligible for the close, begins|
|3:58 PM||Cutoff for cancelling a MOC/LOC for legitimate error|
|3:59:50 PM||Cutoff for d-Quote order entry and modification|
|4:00 PM||Regular way trading ends and auction commences|
|4:02 PM||Closing auctions not yet complete are eligible for|
automated processing by the DMM
|Imbalance Side||Buy/sell direction of imbalance shares|
|Reference Price||Used to calculate Indicative Match Price (generally last sale)|
|Paired Quantity||Number of shares matched at the Indicative Match Price|
|Imbalance Quantity||Number of shares unmatched at the Indicative Match Price|
|Indicative Match Price||Price with largest potential auction size, including auction and book interest|
Imbalance information is published to encourage additional order flow to be directed to the closing auction and maximize the liquidity event. In the minutes leading up to the close, participants can submit MOC or LOC orders that offset regulatory imbalances (each offsetting MOC or LOC order must be smaller than the published imbalance amount)2 or direct their floor broker to represent their order verbally or via a d-quote. The arrival of additional auction-eligible interest, as well as changes in the continuous order book or prevailing market prices, can potentially alter or even flip the imbalance direction. The imbalance publication and tools such as d-Quote allow investors to adjust their trading to current market conditions, respond to indicative liquidity events such as an outsized auction, and create even larger trading opportunities.
The Auction in Action: Bringing more buyers and sellers together
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.
1 YTD through August 4, 2017
2 Closing interest imbalances of greater than 50,000 shares as of 3:45pm are considered regulatory imbalances.