The Impact of Increasing Closing Auction Volumes on Market Quality

In recent years, trading volumes in closing auctions on securities exchanges around the globe have increased significantly. As a result, closing auctions have become the most important liquidity event for European equities. The share of daily trading volume executed in closing auctions increased from 10-15% in 2016 to more than 25% of total trading volume on major European equity markets in 2020, indicating a structural change in the trading environment. The growing importance of closing auctions underlines the need for further research on this topic, especially as the strong volume increase in closing auctions could potentially have a negative impact on market quality in continuous trading.

Therefore, the aim of this master thesis is to present the current state of research on closing auctions and to give a structured overview of existing work on this topic. Likewise, possible drivers of the increasing volumes in closing auctions should be discussed. In the empirical part of the thesis, the impact of increasing closing auction volumes on market quality in continuous trading will be investigated for shares of the FTSE 100 Index traded on the London Stock Exchange (LSE). Specifically, the thesis investigates whether the shifts in trading volumes to the close lead to lower liquidity and higher volatility during the continuous trading session that accounts for the majority of trading hours.