%0 Journal Article %A David Cushing %A Ananth N Madhavan %T The Hidden Cost of Trading at the Close %D 2001 %J Trading %P 12-19 %V 2001 %N 1 %X Closing prices are important benchmarks of value. Portfolio returns and mutual fund net asset values are computed using closing prices, and some contracts and after-hours trading on various Alternative Trading Systems (ATS) are based on closing prices. But herding by institutional traders can cause large price movements at the close, typically in the same direction as institutional demand. As such, these price movements represent a substantial transaction cost, even to those traders who can trade at closing prices. The authors study the behavior of stock returns at the close across the stocks of the Russell 1000 using 1) transaction-level data, and 2) the complete record of all Market On Close (MOC) order imbalance indications. The authors show that institutional trading interest induces a common component to stock returns at the end of the day. This return phenomenon reflects a higher demand for immediacy, manifested in a larger fraction of nonblock trades and greater price sensitivity to nonblock order flow in the closing period. We find systematic return reversals following imbalance publications at the close, especially on days related to index expirations. This is consistent with our hypothesis that liquidity trading at the close on these days creates transitory price movements that represent a substantial hidden cost to institutions. %U https://guides.pm-research.com/content/iijtrading/2001/1/12.full.pdf