Trade NYSE stocks by market-on-close order imbalance, going long on the lowest imbalance decile and short on the highest, using equally weighted portfolios held for five days.
ASSET CLASS: stocks | REGION: United States | FREQUENCY:
Weekly | MARKET: equities | KEYWORD: Closing Auction, Reversal
I. STRATEGY IN A NUTSHELL
Sort NYSE stocks by 3:45 p.m. market-on-close order imbalances. Go long on the lowest decile and short the highest, equally weighted, holding positions for five days and rebalancing accordingly.
II. ECONOMIC RATIONALE
Closing auction imbalances reflect temporary price pressure from uninformed traders. Exploiting these imbalances generates short-term profits, as most price effects partially reverse over the following days, while informed trades leave lasting impact.
III. SOURCE PAPER
Closing Auctions: Information Content and Timeliness of Price Reaction [Click to Open PDF]
Yanbin Wu, University of Florida – Department of Finance, Insurance and Real Estate; Narasimhan Jegadeesh, Emory University – Department of Finance
<Abstract>
Closing auction volume currently accounts for about 11% of the total trading volume. ETF arbitrage trades significantly contribute to this growth, but these trades likely constitute less than 15% of the closing auction volume. The to-close return for the decile of stocks with the largest buy order imbalances in closing auctions is 32 basis points greater than that for the decile with the largest sell order imbalances. About 83% of the return difference reverses over the next 3–5 days. Trading strategies that exploit this phenomenon are significantly profitable.
