The growing importance of the closing auction in share trading volumes

The increasing concentration of share trading volumes at the end of the day is a phenomenon that can be witnessed to varying degrees on all the main markets worldwide. France is, however, one of the markets where this trend has reached the highest levels, with close to 41 per cent of CAC 40 volumes traded at the closing auction on Euronext Paris in June 2019. This rate is well above the 12–14 per cent level seen in the United States. Several factors could account for this phenomenon: • The rapid growth in passive management, for which unit creation and cancellation generally takes place at the end-of-day liquidation value and for which a precise replication entails trading at the closing price. • The obligation of ‘best execution’ and especially reporting obligations of the tradeand- cost-analysis type to which fund managers have been subject since the application of MiFID II. By trading at the closing auction, this type of reporting becomes superfluous. • A move to avoid high-frequency trading (HFT) arbitrageurs, who rarely get involved in the closing auction phase. • Lastly, the role of execution algorithms, which have amplified the preceding factors, as liquidity attracts liquidity. The study also describes the price formation process during the closing auction phase and shows that while volumes and prices converge rapidly towards their final level during the first half of the order accumulation phase (90 per cent of the volumes traded are already present in the order book with an average price differential of 0.30 per cent), final convergence takes place in the last 15 seconds of the auction. Finally, this change in market structure is accompanied by the emergence of certain risks, in particular an increased exposure to operational incidents, which could occur during this very brief phase, and lower levels of liquidity in the rest of the session.