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August 1, 2013

Closing Time

How Traders Are Waiting Until The Final Minutes To Execute Orders

By John D'Antona Jr.

It's 3:45 p.m. The day is almost done; just a few more trades to do. Do you know where your order is?

Increasingly, traders are waiting until the final 15 minutes of the day to trade. Liquidity is more plentiful. Spreads are tighter. Volatility is lower compared with the open. Thus, trading is cheaper and liquidity at its highest.

This shift in activity was most dramatic in 2008, as financial-crisis conditions heightened risk management and spurred traders to "finish the ticket" by the end of the day to avoid wearing excess risk overnight, according to Credit Suisse's Trading Strategy group. By 2010, the broker said, the pattern shift had largely stabilized as the crisis faded, with about 18 percent of all volume transacted in the last 30 minutes of the day. It has stayed stable since.

Rod Burns, Bank of America

Still, in the current low-volume environment where sourcing liquidity remains a problem for the buyside, brokers are again pointing out the virtues of trading at or around the close.

"Many people will tell you the end of the day is the only time to trade," Rod Burns, head of West Coast portfolio products at Bank of America Merrill Lynch, told Traders Magazine.

Nowadays, in the current six-and-a-half-hour trading day, 33 percent of all daily volume is being done during the 30 minutes following the market open and 30 minutes before the close, according to Bank of America data. Four years ago, only 30 percent of all daily volume was done during the same two time periods.

Behind the shift-which pros say is permanent, and not a short-term trend-are several factors. First, now that the fear has worn off from the crisis and macro events are not driving things, the market is less volatile and correlations between stocks have broken down.

This is good news for portfolio managers who pick stocks, but bad news for traders. It has gotten increasingly expensive to trade, especially large blocks.

Second, the use of algorithms has produced trading strategies that rely on more precise timing. They are only effective when there is enough volume to make them effective. That tends to force all trades to the close, when liquidity and participation are the highest.

Third is the prevalence of high-frequency traders who must close out their positions at the end of the day. They don't like to carry positions overnight because of the risk. TABB Group said HFT volume accounts for at least half of total market volume. The HFT trade carries weight.

Finally, you have the inverted, or taker-maker, stock exchanges-Nasdaq OMX BX, BATS Global Markets BZX exchange and some others. These exchanges pay traders to take liquidity and charge suppliers of liquidity. Because many traders, such as HFTs, program and index traders, are in a hurry at the end of the day to get out of positions, they have no qualms about paying an exchange to close out their positions.