Order Flows in the Closing Auction: Evidence from the Hong Kong Stock Market

Since the early 2000s, there has been significant growth in trading volume around the close around the globe, as some institutional investors are mandated to execute at the closing price. As a result, many markets have introduced closing auctions to handle the surge of trading volume near the close. Many studies have examined the closing auction and find that it facilitates price discovery and enhances liquidity. This study proposes to examine the order flows in the closing auction session to understand its relationship with the price movement and trading activity in the continuous trading session. Based on a propriety dataset provided by the Hong Kong Stock Exchange (HKEx), we obtain information on the composition of the order flows, such as at-auction orders (AO) and at-auction limit orders (ALO). We will examine the following issues: (i) the relationship between the intraday trading volume during the continuous trading session and the volume at the closing auction session; (ii) the relationship between the rollover orders from the continuous trading session and the at-auction limit orders; (iii) the relationship between the at-auction orders and at-auction limit orders; and (iv) the return predictability of at-auction orders and at-auction limit orders. This study will contribute significantly to the academic literature as it will be among the first set of studies to investigate the order flows in the closing auction. Results of this project will also be of direct relevance to exchanges and regulators, and our study will provide insights into improving the closing auction mechanism.