Nasdaq's Electronic Closing Cross

Abstract

In April 2004, Nasdaq introduced an all-electronic cross for executing on-close orders and determining the official closing price of its listed stocks. Prior to this innovation, there had been no formal closing mechanism on Nasdaq. The cross operates as a single-price call auction, finding that price that maximizes executed volume and minimizes residual imbalance. An important feature of the process is the high-frequency dissemination of pre-close imbalance messages during the last ten minutes of the trading day. These messages provide traders a transparent view of the state of the on-close order book, allowing them to react with a special order type that buffers imbalances. The cross has been widely accepted by the industry, executing millions of shares daily, much more on expiration and rebalance days. This paper provides a description of the development of the cross and details of its operation. Empirical results are presented showing the variation of the size of the cross as it relates to the type of trading day. The interaction of the on-close orders reacting to Nasdaq's order imbalance messages is demonstrated. The impact of the cross on market quality at the close is investigated along three specific dimensions: the dispersion of prices, fragmentation of trading, and the magnitude of close-to-open price reversals. In all dimensions, the cross appears to have improved the closing process.