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Is Too Much Trading Squeezed into Markets’ Closing Minutes?
A panel of experts considers the end-of-day deluge in many financial markets.
- November 12, 2024
- CBR - Clark Center Panels
In some of the world’s major stock markets, a significant portion of each day’s trading happens in the 10 minutes before the market closes. Research has found, for example, that roughly a third of trades for S&P 500 stocks take place in that window, a figure that has grown from 27 percent in 2021.
One reason is the continued rise of passive investing. Many index funds execute their trades at the end of the day to better align with the benchmarks they are designed to emulate. Is this trading pattern bad for markets? And is it costly for the funds that are driving it? To find out, Chicago Booth’s Kent A. Clark Center for Global Markets polled its panel of finance experts.
Andrew Lo, MIT
“I’m confident that the answer is uncertain. Welfare effects are notoriously hard to compute, and without knowing more about the motivation for these trades and the counterparties involved, it’s difficult to assess their impact on market efficiency and social welfare.”
Response: Uncertain
Christine Parlour, University of California at Berkeley
“Given that agents can choose when to trade, market quality is complex to measure. Trading at the same point in
time can be efficient.”
Response: Uncertain
Stijn Van Nieuwerburgh, Columbia
“Increased trading in the last few minutes could increase price volatility, order imbalance, noise, and market depth in the remainder of the day.”
Response: Agree
Tobias J. Moskowitz, Yale
“Strict indexing creates a trading constraint, which should lead to worse execution, but how detrimental this is remains an open question.”
Response: Agree
Michelle Lowry, Drexel
“While there is some evidence of overnight reversals (i.e., price movements in the last 10 minutes are partially reversed in overnight trading), the magnitude of these reversals is relatively small, and some evidence suggests they may be driven by noise at the market opening.”
Response: Uncertain
Robert F. Stambaugh, University of Pennsylvania
“There could be a performance drag, but probably not a substantial one.”
Response: Agree
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