Stock markets: the importance of the last 10 minutes of trading

Stock markets in the US are active for 390 minutes each weekday. However, recent developments in trading practice suggest that the last ten minutes may be the most decisive.

According to the latest data from BestEx Group Research Group LLC, a specialist in trading algorithms, about a third of all trades in S&P 500 stocks are made in the last ten minutes of the session, a figure up from 27% in 2021.

Increase in passive funds

This increasing focus on the end of the session is driven by the emergence of passive funds (ETFs). The amounts managed by these investment vehicles have exploded, exceeding $11.5 trillion in the United States. These funds very often place their buy and sell orders at the close, using the day’s latest prices to adjust the indices they seek to track. This strategy intensifies trading volume at that particular time of the trading session with potential impact on market liquidity and prices. This growing late-session activity fuels the interest of high-frequency traders and hedge funds, creating a vicious cycle.

In Europe, a similar trend was observed. The closing session now represents 28% of volume on exchange platforms, compared to 23% four years ago.

Although this method used by ETFs is considered relatively efficient, it can create inefficiencies due to the excessive concentration of volumes at a particular time of the trading session.

Research shows that this concentration of closing volumes can disrupt the price formation process and the quality of the trade. A recent study of major capital markets on the London, Paris and Frankfurt stock exchanges found that prices fluctuate between the end of continuous trading and the last price set at the closing auction, with 14% of these movements changing during of the night. This research indicates that these variations are driven more by transaction flows than by fundamentals.

This particular situation raises questions about the challenges associated with passive management and the rise of ETFs. Some experts believe this phenomenon could inadvertently inflate company valuations and cause friction during major index realignments.

However, the exact impact of these distortions at the end of the day is still a matter of debate. Some experts say that price fluctuations during closing auctions are a normal part of market operation and that the associated costs will be lower than the fees that liquidity providers charge for similar transactions earlier in the day.

The concentration of trades in the final minutes of the session highlights a notable shift in trading strategies, primarily influenced by the growing popularity of passive index funds. While this trend may reduce transaction costs and enable better synchronization with benchmarks, it may also introduce increased risks of price volatility and distortion. The real challenge will be balancing the benefits of this practice with the potential risks it may create, taking into account both the interests of investors and the overall health of the stock market.

Leave a Comment