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Closing Auction: Liquidity momentum around rebalances


Author
Choey Li
Quantitative Research Lead, New York Stock Exchange

Published
August 25, 2022

The eight largest NYSE closing auctions have all occurred since June 2020, driven by growth in index rebalance events. We’ve previously studied the market impact of large auction orders and more recently highlighted the significant additional liquidity opportunities at the close. With significant index rebalances on the horizon, we now focus on volume dynamics in the days before and after large index rebalances, finding additional liquidity available in the market.

Signs of momentum in closing auction

Rebalance events are essential trading for passive investors, and excellent liquidity opportunities for active investors and others not tied to a closing price benchmark. To assess the liquidity in these events, we examined closing auction size and the share of volume traded in the close for three days before and after major rebalances, comparing to the trailing 20-day average. We limited our analysis to stocks in the S&P 1,500 or Russell 1,000, which are most likely to be impacted by rebalance events.

We studied rebalance auction events1 in 2021 and 2022 and found that for most stocks the closing auction became larger than usual 2 days prior to the quarterly index rebalance but had little movement ahead of the MSCI rebalances. After the quarterly rebalances, closing auction size remained elevated for two days; after the MSCI rebalances auctions were higher for just one day. The trends for each individual event in 2021 and 2022 are available via the drop-down menus in the charts below.

While we saw general auction growth in many cases, the phenomenon was particularly noticeable for the largest 10% of rebalance auctions. In those cases, increased auction activity typically begins 3 days before the auction, remaining consistently high through two days after the quarterly rebalances and up to three days after the MSCI rebalances (with some more volatility for the MSCI rebalances). This is an especially actionable result, as the stocks most affected by these rebalances are known in advance.

Trading in the final 30-minutes vs closing auction

On an average day the highest-volume trading period aside from the auction is the minutes leading into the auction. Here we examined if this volume curve pattern behaves differently on days near a rebalance. We calculated the multiples of the final 30-minute volume divided by the total intraday volume compared to the trailing 20-day average for the three days before and after rebalances. While the closing auctions often started to become larger in the days prior to the rebalance, as seen above, the final 30-minute volume did not show the same trend but rather showed a similar allocation as other days. This suggests investors should focus on the closing auction events themselves when looking for liquidity on the days before and after rebalances, as the intra-day patterns do not suggest outsized continuous market volume before the auction.

Conclusion

  • Most stocks tend to have large closing auctions starting 2 days prior to quarterly rebalances, with closing auction size remaining elevated for 2 days following the rebalance day; MSCI rebalance events have less effect across the entire market
  • For stocks most impacted by both quarterly and MSCI rebalance events, closing auction volumes show material increase for 3 days before and 3 days after the rebalance itself
  • Trading in the final 30 minutes around rebalance days is not significantly different from other standard days; only the rebalance day itself shows an outsized skew towards the end of continuous trading


1 “Quarterly” rebalances refer to rebalances on the third Friday of March, June, September, and December, when several major indices rebalance; “MSCI” rebalances refer to MSCI index rebalance events which generally occur on the last trading day of February, May, August, and November.

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