Plotting at the Triple Witching Hour: how the Closing Auction has changed
By Daniel Friensener, Quantitative Analyst, BMLL
In November 2023, in the recent article ‘Sounding the bell: understanding the closing auction of optimal execution in global equity markets’. we looked into trading behaviour around the closing auction. We particularly looked into the proportion of daily traded notional that is traded in this period and how this is divided between market and limit orders. In this article, we examine the closing auction in 2024 to determine how things have developed.
(Note: analysis has been performed for the period of January - June for both 2023 and 2024 to give a common timeframe for comparison.)
The share of the closing auction
In 2023 the closing auction was found to account for approximately 10% of the daily traded notional in the US, and 15-20% of that traded in Europe and Japan. Does this continue into 2024? Using the market microstructure visualisation tool, BMLL Vantage, we looked at the S&P 500, Cboe Europe 50 and Nikkei 225 from 2023 to 2024.
US (S&P 500)
Fig 1. The proportion of notional traded in each classification for the S&P 500. Jan-Jun 2023
Fig 2. The proportion of notional traded in each classification for the S&P 500. Jan-Jun 2024
Looking at Jan-Jun 2023, the average notional traded in the closing auction represents 10.9% of the daily traded notional. In 2024 this has increased by approximately 1.4% to 12.3% of the daily traded notional.
Europe (Cboe Europe 50)
Fig 3. The proportion of notional traded in each classification (excluding special price) for the Cboe Europe 50, Jan 2023 - June 2024
Looking at Jan-Jun 2023 (Fig. 3), the closing auction accounts for an average of 10.1% of the daily traded notional on the Cboe Europe 50. Looking into 2024 this proportion increases by 1.6% to 11.7%.
Note that due to regulatory changes in April 2024, the Special Price classification has been filtered out for Europe to avoid skewing the data.
Japan (Nikkei 225)
Fig 4. The proportion of notional traded in each classification for the Nikkei 225 - Jan 2023 - June 2024
Looking at Jan-Jun 2023 (Fig. 4), the closing auction accounts for an average of 16.2% of the daily traded notional on the Nikkei 225. Unlike the US and Europe, moving into 2024 this proportion sees a decrease of 1.8%, dropping to 14.4% of the daily traded notional. Overall, it appears there has been growth in the proportion of notional traded in the closing auction year-on-year in the EU and US.
Triple Witching Events
A key event in the trading calendar, particularly for the closing auction, are Triple Witching days, when stock options, stock index futures, and stock index options all expire on the same day. This happens on the third Friday of March, June, September, and December. Triple Witching days can lead to increased market volatility and trading activity. This is because if contracts aren't closed before they expire, the underlying security may need to be bought or soldIn 2023, we found that Triple Witching days can see a large increase in the proportion of notional traded in the closing auction.
Fig 5. Daily Classified Trades for the CBOE UK 100 in June 2023
Fig 6. Daily Classified Trades for the CBOE UK 100 in June 2024
Looking at the June 2024 Triple Witching day (Fig. 6) on the Cboe UK 100, it can be seen that the overall notional traded increases by 76.1% compared to the June average. Focusing on the proportion of this traded in the closing auction, we see an increase of 365.1% compared to the June average. Note that due to EDSP auctions on the LSE, we also observe a large intra-day auction volume on the Triple Witching day.
Comparing June 2023 (Fig. 5) to June 2024, it can be seen that the significance of the closing auction on Triple Witching days has grown. The total notional traded in the closing auction has increased by 5.9%, however the proportion of the trading day that this represents has increased from 25.9% in 2023 to 37.3% in 2024.
Triple Witching events - The closing auction
Looking closer at the Triple Witching days we can see the distribution of limit (blue) and market (red) orders in the closing auction.
Fig 7. The total size of orders placed in the closing auction, on the day prior to the June 2024 Triple Witching day
Fig 8. The total size of orders placed in the closing auction, on the June 2024 Triple Witching day
Comparing the day prior to the June 2024 Triple Witching day (Fig. 7) to the day itself (Fig. 8) (21-06-2024 vs 20-06-2024) we can see that the total size traded in Limit Orders has increased by 234.1%, and the total size traded in Market Orders by 685.3%.
On the Triple Witching day we see a more pronounced increase in the proportion of market orders due to greater demand to achieve the reference price on these days.
Has the importance of Triple Witching grown since 2023?
Fig 9. The total size of orders placed in the closing auction, on Triple Witching day in June 2023
Comparing June 2024 (Fig. 8) and June 2023 (Fig. 9) Triple Witching days (16-06-2023 vs 21-06-2024) we can see how the Triple Witching day has grown since 2023.
We observed a total growth of the closing auction on Triple Witching days of 46.5%, with a 19.9% increase in the volume of limit orders. Much more significantly, we observed a 206.7% increase in volume of market orders.
In 2023 we see the split of limit:market orders at 86:14, however in 2024 this has shifted in favour of market orders, coming in at 70:30.
Using Level 3 historical data to identify market participant behaviour at the closing auction and Triple Witching.
The closing auction is a critical part of any trading day, with a very large amount of trading in a single event. Whilst different regions and regimes are superficially similar, closing auctions can have very different liquidity profiles, trading mechanisms and order behaviour. Using Level 3 data, participants can better understand when and how to trade during the auction, and how participant behaviour varies across stocks and on events such as Triple Witching days. This helps to make better trading decisions, improve algorithmic strategies and achieve best execution.