Cboe Market Close (CMC), an alternative to closing auctions in the U.S. stock market, is planned to launch on Friday, March 6, 2020, after receiving SEC approval on January 22, 2020.
Cboe Market Close was created to reduce closing auction costs and provide an alternative source of on-close liquidity for market participants by creating competition around Market-On-Close (MOC) orders. Its approval by the SEC staff after a robust, transparent and public comment period affirms the obvious case for introducing this market-defining innovation.
CMC is a product designed in response to a lot of industry persistence and interest in an alternative to the listing market’s closing auction. It’s important because market participants use the closing auction as a liquidity event. Investors frequently use the close to find a buyer and/or seller; and these orders are often sent as market-on-close (MOC) orders, meaning the investor is looking for queue priority and immediacy of execution during the closing auction process.
The importance of the closing auction as a liquidity event is evident by the growth of off-exchange closing trading venues. The SEC recently made Bank of America’s on-close ATS (GCX) effective, bringing the total number of on-close ATSs to seven. Broker dealers develop new or enhance their current ATSs to automate the pairing of agency and/or principal orders that historically would have been directed to the primary closing auction. Recent studies have shown that TRF volumes using the primary closing auction price have reached as high as 30% on some occasions. As broker dealers begin to enhance their principal trading through the use of Central Risk Books, we expect this number to grow at or near the current TRF volumes, 40%, seen in the continuous trading session. There are many broker dealers who cannot afford to allocate legal and technological resources to establish an on-close ATS, therefore CMC is a clear alternative for these firms to pair their client and/or principal orders.
The official closing price of a stock is a widely publicized price used for index calculations and as an important end-of-day reference price for investors and public companies. Listing markets have the exclusive right to operate closing auctions for securities listed on their exchanges. As a result, they can assess a high fee compared to continuous trading, where there are more public and off-exchange venues competing on the same order. Moreover, the primary exchanges have amended their closing auction cut-off times and added new features for broker dealers to incorporate into their electronic trading product suite. As a result, broker dealers have amended their smart order routers to interpret the expected closing auction volume. Since CMC is a simple process, it is an excellent source of on-close liquidity for Central Risk Books, Guaranteed On Close orders or basic smart order routing logic that may attempt to allocate a portion to the close.
Over the years, the listing markets have increased fees for certain on close order types and have amended their closing processes to drive transaction revenue, resulting in market participants and our members coming to Cboe asking for a solution. They’re looking for a price and a public market closing alternative that will still give them the official closing price — and that’s Cboe Market Close. Since there is no publishing of unbalanced information, CMC may be a solution for brokers who are looking to unwind larger positions into the close. At Cboe, we’re always looking for ways to help make the markets healthier and fairer for all market participants. High fees and exclusivity aren’t beneficial to our markets, so we found a better way.
Immediately on March 6, or any trading day thereafter, market participants may begin to route MOC orders to CMC, where they are pre-matched with other MOC orders at 3:35 p.m. ET. The trades are then executed when the official closing price is published, saving participants from paying closing auction fees charged by the primary listing market on orders that are not price forming. In addition, broker dealers don’t have to allocate resources to develop an ATS that could incur additional costs in the future. The timing of the CMC match allows brokers to route any unmatched MOC orders to the primary exchanges’ closing auction or other alternative sources. CMC is available to all participants with no tiering.
With our customer-first approach in mind, the biggest benefits of CMC are cost reduction and simplicity for Cboe members who choose to use this functionality. Our goal with CMC is to provide more choice for market participants and increased efficiency across the board.
For more technical information, see the trade desk notice on Cboe’s website or check out the FAQ.