About one-third of all S&P 500 stock trades are now executed in the final 10 minutes of trading sessions, according to data from trading algorithms developer BestEx Research, marking an increase from 27% in 2021, Bloomberg reported Wednesday.
Similar trading patterns in Europe indicate that this trend might be impacting market liquidity and distorting prices, offering new evidence for critics of the surge in passive investing. Index funds, which typically execute trades at the day's close to align with benchmark prices they track, have been a significant driver behind this shift.
Assets managed by passive equity funds have grown dramatically, now exceeding $11.5 trillion in the U.S. alone, as per Bloomberg Intelligence. This shift to end-of-session trading has attracted more active traders to these peak times, creating a cycle that reinforces itself.
In Europe, the closing auction, which happens post-regular trading hours, has risen to encompass 28% of total volumes on public venues, up from 23% four years ago, according to data from Bloomberg Intelligence and analytics firm big xyt.
“The common knowledge is that closing auctions are very, very good mechanisms to close markets,” said analysts at Goethe University Frankfurt, co-authors of a new research paper titled “Shifting Volumes to the Close: Consequences for Price Discovery (NASDAQ:WBD) and Market Quality.”
“This might be true, but if we have such a shift of volumes to this very last opportunity of trading in the day, we might see price inefficiencies,” they added.
The study, authored by analysts, analyzed large-cap stocks on the London, Paris, and Frankfurt exchanges over four years up to mid-2023.
They discovered that although stock prices shift between the end of regular trading and the closing auction, 14% of this movement reverses overnight, indicating that these changes are driven more by trading flows than by fundamental factors.
The new findings are consistent with previous research, including a 2023 U.S. study, which also found that price movements during closing auctions tend to revert overnight due to liquidity dynamics.
This data supports broader criticisms of passive investing, such as its potential to indiscriminately boost company valuations and disrupt markets during major index rebalancings, leading to massive one-directional trades. Such issues have drawn sharp criticism from high-profile figures like Elon Musk and David Einhorn of Greenlight Capital.
Meanwhile, analysts at BestEx Research defend the timing of passive fund trades, suggesting that although they might pay slightly more at the close, the overall cost is much less than dealing with thinner liquidity at other times.
The U.S. system for setting closing prices, which operates during the last minutes of the trading day, handled nearly 10% of all share trades last month, echoing the peak levels of 2019, data collected by Rosenblatt Securities demonstrates.
Chuck Mack, head of strategy for North American trading services for Nasdaq, notes the transparent price discovery and “depth of liquidity" that closing auctions provide, highlighting the minimal impact on U.S. intraday liquidity despite the increased trading at different venues.
Meanwhile, a 2022 research by analysts pointed out that what appears as market distortions in Europe might just be initial noise at the market's open, suggesting that intraday liquidity remains robust.
Analysts said regulators don’t have reason for concern yet, “but should continue to watch this space in case things change.”