Nasdaq's Closing Cross

Abstract

On March 29, 2004, Nasdaq significantly expanded its hybrid market structure by introducing the closing cross, an electronic price discovery call auction that sets closing trades and establishes official closing prices. Three months later, on June 25, the efficiency of the new facility was stress-tested by the Russell 2000 rebalancing, an event that involved almost 1,700 Nasdaq stocks. The efficiency of the closing cross can be analyzed by comparing price dislocations experienced at the 2004 rebalancing with those observed at the 2003 rebalancing. By and large, the findings suggest that the closing procedure is effective, especially for the smaller-cap stocks in the Russell 2000 index.