Closing time: The effects of closing mechanism and design on market quality * Nicholas Cordi University of Sydney Ester F´ elez-Vi˜ nas Stockholm Business School Sean Foley † University of Sydney T¯ alis Putni¸ nˇ s University of Technology, Sydney February 27, 2018 Abstract We study the effects that different closing mechanisms have on market efficiency and integrity by exploiting the change in closing mechanism of 43 exchanges around the world. Delineating two main categories of closing mech- anisms, we find that batch facilities, in particular call auctions, significantly improve price efficiency relative to last-trade mechanisms regardless of the level of development of the market or the liquidity of the stock. For developed mar- kets, the introduction of a closing auction also translates into improvements of market integrity. Further, we find evidence supporting the importance of auction design in boosting market quality. Closing auctions tend to be more beneficial if they integrate a randomized closing time and price stabilization systems. Our results have implications for regulators and exchanges seeking to improve the efficiency and integrity of their capital markets. * The authors acknowledge the generous funding assistance of the Centre for International Fi- nancial Regulation. We are thankful for thoughtful comments from participants at the 12th Cen- tral Bank Workshop on the Microstructure of Financial Markets, Michael Aitken, Angelo Aspris, Michael Goldstein, Carole Gresse (discussant), Bj¨orn Hagstr¨omer, Frank Hatheway, Amy Kwan, Richard Phillip, Reuben Segara and Avanidhar Subrahmanyam. † Corresponding author: sean.foley@sydney.edu.au