The closing auction publishes a 2m share buy imbalance against 6m shares of paired volume in a stock with 20m shares of average daily volume. Assume a 1% of average daily volume imbalance moves the close about 5 basis points. The continuous market is 40.00/40.02. Where does the auction clear and what do you do?

The closing auction publishes a 2m share buy imbalance against 6m shares of paired volume in a stock with 20m shares of average daily volume. Assume a 1% of average daily volume imbalance moves the close about 5 basis points. The continuous market is 40.00/40.02. Where does the auction clear and what do you do?

Approach: Convert the imbalance into a share of average daily volume, apply the stated elasticity to get the concession in basis points, then decide which side of the auction you want to be the marginal supplier on.

40.21. The imbalance is 2m/20m = 10% of average daily volume, so at 5 basis points per 1% the concession is 50 basis points, which on a 40.01 mid is 20 cents and puts the clearing price near 40.21. The trade is to buy in the continuous market now and sell into the auction, because a buy imbalance has to be filled by price-sensitive supply and the auction pays for it. Two risks sit against that. The imbalance can flip in the late updates, and other participants can supply the same 2m shares, in which case the concession collapses and you are long into the close with no exit until the next session. Size the position against the share of the 2m you expect to be the marginal supplier of.

Follow-up: The imbalance updates from 2m buy to 400k sell with two minutes left. What is your exit and what does it cost?

Key concepts: closing auction, imbalance, price concession, average daily volume.