Smart Close Algorithm
The closing auction is one of the biggest liquidity events in global equity markets. It represents about 10% of the total volume in U.S. and Asia, and 20% in Europe (Table 1). On special event days, such as month end and futures expiry, closing auction volume can be as much as doubled from the regular days. Institutional traders often participate in the closing auctions because they are benchmarked to the closing prices or they want to leverage the available liquidity in the auctions. A tropicalized algorithm is needed to account for the regional differences in the market microstructure. Executing the whole order in the closing auction can lead to significant impact on the closing price. Traders may opt to trade part of their order in the continuous session to limit their market impact, and the ideal allocation would then be a balance between market impact (trading in the closing auction) and tracking error (trading in the continuous session). To facilitate our clients in this regard, Bloomberg Tradebook’s Smart Close Algorithm offers a dynamic and customizable strategy that provides an optimal execution to benchmark the closing price. Smart Close also leverages Tradebook’s closing auction technology and the proprietary volume prediction model to achieve the ideal execution.