What is the 'Closing Cross'

The closing cross is an algorithmic  price discovery calculation used by Nasdaq to establish the closing price of each security traded on the exchange. This calculation generates a closing price designed to match as many buy and sell requests as possible at the end of the trading day. Market on close, limit on close and imbalance-only orders only take place during the closing cross.

BREAKING DOWN 'Closing Cross'

The closing cross takes place at exactly 4 pm ET each trading day and acts as a price discovery mechanism for all outstanding orders. The closing cross enables market participants to execute orders, including  market and limit orders, at the close at a fully transparent price that reflects actual closing market activity. The Nasdaq Official Closing Price set for Nasdaq-listed securities by the cross serve as benchmark prices throughout the industry for calculating mutual fund net asset values and index valuations.

The closing cross, like the opening cross, is open to all securities listed on the Nasdaq, NYSE, NYSE Amex and NYSE Arca exchanges. In addition to providing market participants efficient price discovery and transparency, the closing cross provides a facility for resolving order imbalances that arise in critical events such as expiration dates for index futures and options, and index rebalances.

At 3:50 p.m., Nasdaq begins the closing auction process and disseminates information about any order imbalance on the closing book through its Net Order Imbalance Indicator, along with an indicative closing price. At exactly 4 p.m., the closing book and the Nasdaq continuous book are brought together to create the Nasdaq closing cross. Nasdaq distributes the closing cross price to the financial industry and newswires immediately.

Order Types Related to the Closing Cross

The closing cross uses a combination of regular daily trading and three types of orders that take place only at the close of trading.

Market on close orders request the purchase or sale of a financial instrument at whatever closing price the market establishes at the end of the day. The flexibility provided by this type of order makes them relatively easy to match and they end up taking place at the price established by the closing cross.

Limit on close, or LOC orders also request a purchase or sale of a security at the closing price. Unlike MOC orders, LOC orders establish a range of acceptable closing prices at which the trade can occur. For example, if an LOC buy order specifies a maximum limit price of $10 per share for an equity security and that security closes at $9.99, the order will be filled at $9.99.

Imbalance only orders round out the process. These orders function like LOC orders but typically get placed by dealers in an effort to ensure enough matches exist when the NOII indicates an imbalance between buyers and sellers on a given security.

See The Closing Cross: How NASDAQ Stock Prices Are Set for more detail on how Nasdaq performs this calculation.

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