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.
Multi-list options broke nearly all volume records in 2021, driven by the growth of retail participation: daily records (24 of the top 25 volume days of all-time came in 2021), monthly ADV records (April was the only month from 2021 not in the top 12 all-time), and yearly ADV records (37.3M ADV in 2021 was nearly 10M more than in 2020 and double the ADV in 2019).
Increased retail activity in the equities market has affected which stocks are trading the most, and when and where those stocks trade. We’ve previously highlighted retail’s impact on pre- and post-market volume and the opening auction, and now focus on the period immediately after the opening auction. Market participants often avoid this time of day due to higher volatility, an approach worth re-evaluating given current trends.
As the home of ETFs, the NYSE continuously works to strengthen market quality and provide the optimal trading environment for listing and trading ETFs. In April 2021, in service of this goal, the NYSE introduced new requirements and incentives for its industry-leading NYSE ETF Liquidity Program, including the assignment of additional market makers ("Less Active ETF Leads") for new and/or low-volume ETFs.