Closing auction order impact
Size Opportunities Late in the Day
Author
Steven W. Poser
Steven W. Poser
Director of Research
Published
January 11, 2024
The NYSE Closing Auction remains the largest equity liquidity event, trading on average more than $18bn per day1. We have previously studied Closing Auction liquidity, participation, and price dislocation, and now focus on the price impact of auction order submission. We find that the market absorbs most large orders with little impact to the current stock price, especially on standard (i.e., non-rebalance) trading days.
We assess market impact of auction orders by examining the reference price and auction quantities from the auction imbalance data. Key data elements:
- Imbalance Reference Price: generally the NYSE last sale2
- Imbalance Quantity: the volume of better-priced buy (sell) shares that cannot be paired with both at-priced and better-priced sell (buy) shares at the Imbalance Reference Price3
- Paired Quantity: the volume of better-priced and at-priced buy shares that can be paired with better-priced and at-priced sell shares at the Imbalance Reference Price4
- Imbalance Change Ratio: the immediate imbalance volume change at the order entry over the rolling average of the total imbalance and paired quantities in previous 5 imbalance messages
Using these elements, we examine the direct price impact (as measured by the reference price change) per security based on the imbalance change ratio. We focus on updates in the last 5 minutes of the trading day; during this time auction orders may be entered via the Trading Floor and are immediately reflected in the imbalance messages. We also focus on the largest imbalance quantity changes, which we consider a proxy for significantly sized orders.
Order Sizing and Price Impact
- This analysis focuses on the largest 2.5% of imbalance change ratios.
- These events represent on average 12% - 36% of the displayed total imbalance and paired quantity for stocks in the Russell 1000 index and 23% - 78% for other stocks.
- The 0.25% largest imbalance change ratios on standard days in Russell 1000 stocks represent roughly 36% of the published liquidity already in the auction.
- Order Sizing
- On rebalance days, auction orders for widely-held stocks such as those in the Russell 1000 have substantial liquidity early in the day, which means a large auction order entered in the last 5 minutes has less liquidity relative to existing auction liquidity.
- The opposite seems to hold for other stocks on rebalancing days, with large orders entered in the last 5 minutes representing a greater portion of the auction order liquidity relative to auction orders submitted earlier in the trading day.
3:55 - 4:00pm NYSE-listed Russell 1000 Stocks Imbalance Change Ratio
3:55 - 4:00PM All Other NYSE-listed Stocks Imbalance Change Ratio
- Price Impact per Order Size
- In most cases, observed price impact was well less than 1 times a stock’s daily average spread.
- As expected, the largest orders entered in the last 5 minutes had the most price impact.
- We consider ratio changes in the top 0.25% of all observations to be the largest orders.
- Interestingly, the more widely held Russell 1000 stocks were more impacted by the largest orders.
- On standard days, these stocks had a median 0.71X spread5 reference price move, compared to a 0.5X for other stocks.
- Rebalance days, when major indices such as the S&P, FTSE Russell, MSCI, and others adjust their portfolios, see more price impact from the largest changes.
- Russell 1000 stocks saw 1.77X spread moves, while other stocks saw 0.72X.
3:55 - 4:00pm NYSE-listed Russell 1000 Stocks Reference Price Change
3:55 - 4:00pm Other NYSE-listed Stocks Reference Price Change
- Price Impact over Time
- We further focus on the largest 0.25% imbalance change ratios over time in the last 5 minutes of the trading day.
- On standard days, price movement is fairly flat until the very last minute of the day.
- On rebalance days, these orders have increasing price impact throughout the period for Russell 1000 stocks; other stocks show decreasing price impact until the last 2 minutes.
3:55 - 4:00pm NYSE-listed Russell 1000 Stocks
3:55 - 4:00pm Other NYSE-listed Stocks
- Price Impact per Order Size over Time
- We investigate further on how the price impact looks given different order sizes over time in the last 5 minutes of the trading day.
- The largest orders have the most significant price impact for stocks in Russell 1000 index in the last 5 minutes on rebalancing days.
3:55 - 3:56pm Reference Price Changes
3:56 - 3:57pm Reference Price Changes
3:57 - 3:58pm Reference Price Changes
3:58 - 3:59pm Reference Price Changes
3:59 - 4:00pm Reference Price Changes
Conclusion
- On standard days, most large auction orders submitted in the last 5 minutes have less than 1X spread of impact on the market price.
- We see little difference in market impact between large orders and smaller orders.
- On these days price impact lessens or remains constant until the very last minute of the day.
- On rebalance days, prices seem more sensitive to increases in imbalance quantity.
- The largest orders in Russell 1000 stocks can have more significant price impact than orders in other stocks.
- Highlights
- The leverage in flexibility and size capacity on standard days could be further explored.
- Submitting orders early on rebalances and allowing offsetting interest to enter the market could have a less significant market impact.
1. YTD through Sept 14, 2021
2. For complete descriptions see NYSE Rule 7.35 at https://nyseguide.srorules.com/rules/document?treeNodeId=csh-da-filter!WKUS-TAL-DOCS-PHC-%7B4A07B716-0F73-46CC-BAC2-43EB20902159%7D--WKUS_TAL_19401%23teid-44
3. Ibid
4. Ibid
5. This metric is calculated by dividing the reference price change by the stock’s average spread for that day