The annual Russell US Indexes Reconstitution in late June is a major event for investors and traders. FTSE Russell updates both market capitalization and investment style definitions, which means the impact cuts across companies of all sizes. This can result in large liquidity demand as index funds need to rebalance their portfolios and active investors seek to leverage the unusual liquidity in hard-to-trade securities.
The 2020 reconstitution on June 26 was expected to be one of the largest on record, and it did not disappoint. The NYSE Closing Auction had its second-largest trade ever by shares, executing 2.3 billion shares valued at nearly $70 billion. Nasdaq traded roughly 1.6 billion shares with a notional value of almost $57 billion.
NYSE Designated Market Makers (DMMs) may facilitate Closing Auctions electronically or with human manual intervention. Such DMM-facilitated Closing Auctions guarantee execution of all interest priced better than the auction price, including all Market orders.1 During index rebalances, this execution guarantee is key and provides advantages over competing exchanges' (or NYSE Exchange-facilitated) closing auctions, which have pre-determined price boundaries that can cause market orders to not fully execute.
To assess the NYSE Closing Auction, we compared the volume-weighted average price during the final two minutes of trading to the closing auction price for securities that had a rebalance need. This difference, or price dislocation, indicates how well a closing process reflects market prices at the end of regular-hours trading. Lower dislocation means investors are receiving fairer prices. We found:
The NYSE Closing Auction remains the largest equity liquidity event in the world. With the NYSE Trading Floor partially re-opened, investors benefit from both the Closing Auction’s liquidity and fairer prices. These benefits are especially critical during major trading events such as index rebalances.
1 For the Russell Reconstitution all auctions were facilitated by DMMs and no securities closed via the Exchange-facilitated auction process.
2 138 NYSE securities and 271 Nasdaq securities meet this definition and had at least one trade in the last two minutes.
To enhance visibility and understanding of the Closing Auction process, NYSE has introduced a graphical interface with a trailing three months of closing imbalance feed historical data for the 1,000 largest daily Closing Auctions.
NYSE research reviewed option usage trends to end 2022 and start 2023: 2022 options market activity was generally aligned with equity market moves. Average monthly put-call volume ratio in 2022 was higher than 2021 but declined sharply at beginning of 2023. In 2022, floor traded a higher put premium relative to call but a much lower put premium in 2023. Moreover, electronic trading saw more activity in SPY and QQQ, while floor trading saw most activity in HYG. Also, floor trading had a significantly higher put-call ratio than electronic trading for days around FOMC meetings and CPI announcements over most of this period.
PIMCO’s Active Bond ETF (NYSE: BOND) recently transferred to the NYSE. Since the transfer, intra-day liquidity has improved, and auctions have experienced better pricing compared to key benchmarks.