The Wall Street Journal: The 30 Minutes That Can Make or Break the Trading Day

Sharp stock moves are punctuating the final minutes of the trading day, exacerbating what has already been one of the rockiest stretches of the past decade for financial markets.

Major U.S. stock indexes peaked in mid-February and have since dropped at least 19%, with the Dow Jones Industrial Average entering a bear market, reflecting worries that the coronavirus epidemic will halt growth and eventually tip the economy into a recession. Trading toward the end of the session Wednesday was turbulent and selling in the last minutes of the day pushed the Dow into its bear market.

As investors have fled stocks and rushed into safe-haven assets like government bonds, sudden late-day moves in the stock market have been a staple, creating climactic swoons—and surges—right before the 4 p.m. closing bell.

The Dow has swung an average of about 300 points in the last 30 minutes of trading over the past 10 sessions—including Tuesday’s dramatic rally of roughly 400 points to end the day. That is roughly triple the average swing recorded between 12:30 p.m. and 1 p.m., when activity hovers near its lows of the day, for the same period.

The volatility has at times puzzled traders as they navigate a tumultuous market. Some attribute the heightened activity to a yearslong trend in which more trading is taking place at the end of the day, including at the closing auction—or the final 4 p.m. trade—which determines end-of-day prices for thousands of stocks.Assets under management for passivestrategiesSource: Morningstar DirectNote: Figures for 2020 through January. Includesexchange-traded and mutual funds..trillion2008’10’12’14’16’18’20012345678$9

From the start of this year through Friday, about 23% of trading volume in the 3,000 largest stocks by market value has taken place after 3:30 p.m., according to data from Pragma LLC. That’s compared with about 4% from 12:30 p.m. to 1 p.m.

Closing auctions have grown in volume over the past decade, in part because of the rising popularity of index funds, whose managers passively track indexes like the S&P 500, rather than actively seeking to pick stocks. These types of investments often use closing prices as a benchmark, leading their managers to execute trades at the end of the session.

As index funds have fueled a frenzy of trading at the close, other big investors have shifted much of their trading to the end of the day, taking advantage of the growing presence of big market participants.

“It’s actually the best time to catch the big next move on the upside,” Paul Ollivier, a retail trader based in Naperville, Ill., said of the last hour of trading.

He said he decided to jump into the market at about 3:30 p.m. on Feb. 28, near the end of the worst week on Wall Street since the financial crisis.

The Nasdaq Composite was just starting to rebound from a 2% intraday decline, so Mr. Ollivier said he bought bullish call options betting that the tech-heavy Invesco QQQ Trust, which closely tracks the index’s performance, would advance. These contracts give the right to buy shares at a specific price, later in time, and would profit from the exchange-traded fund’s rise.

The index ended up bouncing 2.1% in the last 30 minutes, narrowly clinching a gain for the day. Earlier in the session, it had fallen by as much as 3.5%, making Friday the first time since November 2008 that the index had fallen at least that much and still closed in positive territory, according to Dow Jones Market Data. The Dow industrials, meanwhile, surged about 640 points in the last 20 minutes of the session, paring much of the day’s decline.

Patrick Nichols, a partner at trading firm Old Mission Holdings, said he often trades at the end of the session, when exchange-traded funds, pension funds and other investors are also active.

There has been more activity there “than at any other time on planet Earth,” said Mr. Nichols. “Volatility has been exacerbated into the close.”

The past few weeks have been particularly busy, he said.

Traders can enter orders to buy and sell in the closing auction throughout the trading day, but such activity tends to heat up toward the end of the day. In the closing minutes of trading, stock exchanges indicate whether there are more buy or sell orders for stocks and exchange-traded funds ahead of the end of the trading session.

Some traders use these “imbalance” messages as cues to start placing bets ahead of the closing bell in anticipation of what they think the final prices will be. For example, if there appears to be heavy demand for a stock at the end of the day, a trader might opt to buy minutes before the bell, expecting gains.

“People can bring those into their models and be predictive about where they think the market is going to close,” said Rob Bernstone, a managing director at Credit Suisse Group AG , before the recent selloff. “It gives people time to respond to it. That’s why you might see the last five to 10 minutes have some volatility.”

At 3:50 p.m. on Feb. 28, for example, Nasdaq indicated that buying interest in shares of Amazon.com Inc. in the closing auction outweighed sales by about $143 million, a bullish signal for the stock. Amazon’s share price gained $41.35 in the next 10 minutes to close at $1,883.75, a gain of more than 2% from where it was trading at 3:50 p.m.

Old Mission’s Mr. Nichols said some trading algorithms—basically investment recipes that automatically buy and sell based on preset inputs—are helping fuel the activity. Some tactics use volumes as indicators to trade, transacting at the most popular times as a result.

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“All that algorithmic trading is creating a feedback loop,” Mr. Nichols said.

Some analysts say the compressed end-of-day activity comes at the expense of trading at other times. In periods of market stress, it often gets tougher to buy and sell stocks, a sign of waning liquidity in the market. Others say being on the wrong side of the move toward the end of the day can be costly, given how violent the swings can be.

“Everyone is trading into the close because their portfolios are benchmarked to the close,” said Spencer Mindlin, a capital markets analyst at Aite Group. “The more trading that’s going at the close and the more [it] gravitates, it’s draining it out of the liquidity pool that’s there during the day.”

Some traders have decided to sit out other parts of the day entirely.

Mordy Chaimowitz, a day trader from his home in Spring Valley, N.Y., said he usually trades stocks from 4 a.m. to 11 a.m. and then again from 3 p.m. until 8 p.m., drawn to bigger opportunities to profit at those times.

“I use the four-hour break to catch up on some sleep, play tennis or tend to other family matters,” Mr. Chaimowitz said.

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