Data Insights

The shifting dynamics of the NYSE Closing Auction

An inside view

The NYSE Closing Auction has traditionally been - and remains - the largest liquidity event of the US trading day. Through the first three quarters of 2023, the NYSE Closing Auction typically sees an average of 300 million shares ($17.8bn) trading on a normal day, and close to 2.5 billion shares ($116bn) on options/futures expiration and index rebalance days. Investors can employ a variety of order types to participate in the closing auction, providing flexibility in managing risk and market impact. In this post, we dive into the NYSE Closing Auction and provide an inside view into closing auction order entry time dynamics and performance.

D-Orders Gain Momentum

Closing D-OrdersTM - submitted exclusively through NYSE floor brokers - provide additional flexibility over Market on Close (MOCs) or Limit on Close (LOCs) orders as floor brokers can interact with liquidity on either side of an imbalance on behalf of their clients, with additional time for order entry and modification. In Q3 2023, D-Orders overtook MOCs as the top order type in terms of executed volume in the NYSE Closing Auction for the first time since their introduction. In Q3 2023, D-Orders accounted for 42.7% of executed volume, up from 34.5% at the start of 2021. This marked the third successive quarter of increasing D-Order share with MOCs giving up almost the entirety of that share gain.

Last 5 Minutes Still Lead

One of the distinct features of D-Orders is the ability for floor brokers to submit D-Orders up until 3:59:50PM, compared to the 3:50:00PM cutoff for MOCs and LOCs. As Figure 2 below shows, over 90% of all D-Orders are submitted after 3:30PM, and over 2/3 are submitted within four minutes and fifty seconds of the cutoff time.

At the end of 2022 the NYSE introduced new flexible connectivity options for Floor Brokers, allowing firms to design their own proprietary order management systems for their clients or use a new standardized solution. As of October 2023, over 40% of all D-Orders executed in the NYSE Closing Auction are submitted by floor brokers using these new connectivity options. Throughout this transition, the order entry dynamics shown below remain steadfast.

While this order entry time trend has remained largely steady, there is meaningful variance on special days such as index rebalances. As Figure 3 shows, on special event days the distribution of submitted D-Orders skews towards the earlier part of the trading day and, despite the last five or so minutes still seeing most of the order flow, pre-3:30PM D-Orders account for double their normal share on the largest such events (e.g., Russell Reconstitution, quarterly rebalances).

NYSE Closing Auction Performance Continues to Improve

One way to evaluate the impact of these order entry trends is to examine the slippage between the official NYSE Closing Price and the Volume-Weighted Average Price (VWAP) of preceding time intervals leading into the start of NYSE Closing Auction. Figure 4 below shows a time series of the median slippage between the NYSE Closing Price and the preceding 3-minute VWAP broken down into four distinct time groups. The slippage, or deviation, between the official closing price and NYSE VWAP during those time groups between 3:57PM and 4:00PM has been steadily narrowing since the start of 2023. This suggests improved price discovery in the Closing Auction as liquidity has increased and access methods have expanded.

Finally, we examine market volatility in the last ten seconds of trading (3:59:50-4:00:00). Figure 5a shows a timeseries of the notional-weighted coefficient of variation1 during the last ten seconds of trading for Tape A and Tape C corporate stocks broken down by dollar-notional group, while Figure 5b shows the notional-weighted price range2 of each corporate stock’s price movement during the same interval. Both charts show that 1) NYSE-listed corporate stocks - especially those in the lower dollar-notional groups - experience less end-of-day volatility, and 2) thus far this volatility advantage has remained stable during the ongoing Floor Broker technology migration.

Conclusion