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Closing Auction: Internalization effect throughout imbalance period

Choey Li
Quantitative Research Lead, NYSE

November 17, 2022

The NYSE Closing Auction accounts for 7.3% of total consolidated average daily trading volume in NYSE-listed securities, and over 10% in NYSE-listed securities that are in the S&P 500 Index. In addition to this unique, immense aggregation of liquidity in a single trade, broker-dealers fill some client on-close orders off the exchange prior to the closing auction and then use the closing price after the auction has occurred to complete the transaction. This activity accounts for, on average, roughly 23% of total closing price trading volume in NYSE-listed securities, and we observed similar internalization rates and trends for securities listed on other markets1.

Chart 1: NYSE S&P1500 Closing Price Internalization % by Listing Exchange

Matching orders off exchange prior to the auction precludes that trading interest from participating in the auction itself. This pre-matched trading interest is not included in the paired and imbalance quantities displayed on the imbalance data feed; only the market participants involved in the off-exchange match are aware of this interest’s existence.

NYSE Research studied these instances of internalization and their impact on trading. Our study is based on imbalance feeds and evaluates price drift leading into the auction and price slippage in the closing auction for the highly internalized stocks versus others included in S&P400, S&P500 and S&P600 indexes during the 6-month period of March to September 2022.

Price drift throughout the imbalance period

For this analysis, we defined “Internalization Rate” as described below, to more precisely identify auctions where paired volume data was affected by internalization behavior. The paired quantity reported in the first message out at 3:55pm represents the matched volume in the auction entering the last 5 minutes of continuous trading; more shares paired relative to the total matched shares at close indicates less internalization activity.

We then measured the price drift in individual stocks over the last 5 minutes of trading. To measure the price drift for every stock independently, we excluded the part in the price drift driven by overall market volatility in the last 5 minutes.

We found that median price drift ranged from 3bps to 12bps, and the highly internalized stocks with 5% highest internalization rate showed relatively higher price drift compared to others throughout the last 5 minutes. Particularly, as we moved closer towards the close, we observed a bigger difference in price drift between the highly internalized group and normal group.

The percentage of shares associated with internalization may be directly related with price drift during the imbalance period. The internalized orders may also include information that could be used to effectively move the imbalances published every second and eventually help price the auction closer to its fundamental value.

Chart 2: NYSE S&P1500 Price Drift for Highly Internalized Names and Others

Price slippage in closing auctions

We further measured the closing auction slippage, defined as the price difference between the auction price and 2-minute VWAP preceding the auction. The highly internalized group showed higher slippage at closing auctions, meaning that highly-internalized auctions tended to price further away from end-of-day continuous market trading.

Chart 2: NYSE S&P1500 Closing Auction Slippage for Highly Internalized Names and Others


  • The highly internalized stocks showed higher price drift throughout the last 5 minutes trading into the close
  • The highly internalized stocks showed higher price slippage in the closing auctions

1. Measured as volume printed to the Trade Reporting Facility within 15 minutes of the closing auction, divided by primary market closing auction volume plus volume printed to the Trade Reporting Facility within 15 minutes of the closing auction.

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