Closing Auction Contingency Plan

We blogged two weeks ago about the NYSE shutdown that halted trading for four hours on Wednesday, July 8th. Because the market was able to open again before the end of the trading day, we focused on the fact that the NYSE, while important, is by no means the sole place to trade securities in modern markets. However, if the NYSE had been unable to resume trading that day, an important function would have been missed: the closing auction of the day. This is of particular importance to index funds, which use the closing auction prices to closely match the underlying benchmarks they are designed to track. The high trading volume around the closing auction is also an ideal time for investors with large orders to make trades without really impacting the market price. Since, in recent years, individual investors have allocated a great deal of their personal wealth to low-fee index tracking funds, the closing auction is of great importance to investors both big and small.

In recognition of the importance of the closing auction, the NYSE and NASDAQ (normally rival exchanges) have reached an agreement to back up each other's closing auctions to ensure that they take place in the event of another market glitch or shutdown. The proposal will now be filed with the SEC, which will seek industry comment. Pending those comments and SEC approval, a timetable would then be set to implement the new backup plan.

In response to news of the agreement, the head of global equity indexing at fund powerhouse Vanguard (a major provider of index funds) noted that “The closing auction is a highly effective mechanism and we absolutely applaud and want closing auctions.”