33% of all S&P 500 stock trades are now executed in the final 10 minutes of the session, according to data compiled by BestEx Research

Around one-third of all S&P 500 stock trades now take place in the final 10 minutes of the trading session, according to data from BestEx Research, up from 27% in 2021.

Evidence from Europe, where a similar pattern is observed, suggests that this trend may be impacting liquidity and distorting prices. Critics of the global rise in passive investing point to index funds as driving this phenomenon. These funds typically execute trades at the close, using the last prices of the day to set the benchmarks they aim to replicate.

The assets in passive equity funds have soared to over $11.5 trillion in the US alone over the past decade, shifting more trading activity to the end of the session. Active traders seeking to capitalize on this liquidity have followed suit, creating a self-reinforcing cycle.

In Europe, the closing auction, which occurs after regular trading ends, now accounts for 28% of volumes on public venues, up from 23% four years ago, according to data from Bloomberg Intelligence and big xyt.

While closing auctions are generally seen as effective mechanisms to close markets, the shift of volumes to this last opportunity of trading in the day could lead to price inefficiencies, according to Benjamin Clapham, co-author of a research paper on the topic.

The paper, which analyzed large-caps on European exchanges, found that shares often move between the end of continuous trading and the closing auction's last price, with 14% of that move reversing overnight, indicating it's driven by one-sided flows rather than fundamentals.

Critics argue that passive investing can inflate company valuations and cause disruptions during major index rebalances. However, the extent to which these closing distortions should raise concerns is uncertain, and the debate continues.

For Hitesh Mittal, founder of BestEx Research, the overnight reversion is a normal market function. While passive funds may buy at slightly higher prices at the close, he believes the cost is much lower than what liquidity providers would charge earlier in the day when liquidity is thinner.

In the US, the mechanism to determine closing prices runs alongside the last minutes of continuous trading, with nearly 10% of all US shares traded in the closing auction last month, nearing previous highs.

While regulators continue to monitor the situation, market participants generally see closing auctions as transparent and providing depth of liquidity. In Europe, observers note that observed price reversals may be due to noise at the market open, rather than distortions, and that intraday liquidity hasn't been significantly impacted by the closing auction.