Closing auction
The closing auction is an auction that takes place at the end of the trading day in which as many company shares as possible are traded at a uniform price. This is important for trading derivatives for which the daily closing price is relevant.
Similar to the closing auction, there is the opening auction and, at some trading venues, there is also a midday auction. The closing auction is usually the most important.
Closing auction process
The closing auction begins with a call in which the exchange provides an indicative price. In this phase, all orders are placed that were not executed during the normal trading day . In addition, new orders can be submitted and the orders that are marked with auction only are included.
This phase ends after a random time. A program now calculates the price at which the highest volume of shares can change hands. This price forms the official closing price. Additional shares can now also be traded at this price. After the auction, after-hours trading continues or the exchange closes.
Some exchanges have restrictions on how much the price can deviate from the last share price in order to avoid mistrades or high volatility . If, for whatever reason, no closing auction takes place, the last share price is the closing price.
The closing auction takes between 5 and 15 minutes depending on the share, market situation and trading venue.
Effects of the closing auction
Due to the growing influence of derivatives in the financial world, the last minutes before the closing auction are usually the times with the highest volume of securities traded and sometimes lead to strong fluctuations compared to the daily prices. This is particularly noticeable when a stock leaves or joins a known index.
Incorrect estimates of the liquidity of a share in the closing auction can also lead to massive price fluctuations.