Research seminar “The rise of trading on close: drivers and price discovery implications” by Martha Khomyn

Description

In many markets, trading volumes have shifted dramatically towards the close of the market, putting increasing stress on closing mechanisms. We show that index investing, including ETFs, is by far the most important driver of this trend. The rise in algorithmic trading and resulting falling trade sizes also increases the demand to trade on close, where liquidity is consolidated. Using exogenous shocks to dark trading, we find a substitution effect between dark pools and trading on close, both being mechanisms favored by large institutional investors. Finally, we show that the increasing trading on close does not tend to increase the informativeness of closing prices, highlighting the continued importance of the continuous trading session for price discovery.