Vestigial Tails: Floor Brokers at the Close in Modern Electronic Markets

Closing auctions determine daily closing prices and trillions of dollars of net asset values. We study closing auction market quality on NYSE and Nasdaq as measured by the accuracy of indicative closing auction prices, volume, and order imbalances. Closing auction market quality is significantly lower on NYSE compared to Nasdaq due to the existence of a second-stage auction period on NYSE which is exclusive to floor brokers. When NYSE closes its floor during the COVID-19 pandemic, we find that NYSE auction quality improves. We use exogenous shocks to impatient liquidity trader volume stemming from end-of-month portfolio rebalancing periods and "triple witching" days to show that closing auction market quality is worse on NYSE because impatient liquidity traders pool their orders in the first-stage auction period. Consistent with this view, NYSE auction quality deteriorates during our 2011-2018 sample period as passive investing overtakes active management.