Chasing the Same Signals: How Black-Box Trading Influences Stock Markets from Wall Street to Shanghai

Chapter 8. The Russell Rebalance

Why the Market's Close Doesn't Always Reflect Our Economic Health

The market's closing price is one of the most relevant metrics on a public company. CEOs regularly quote their stock's closing price to employees as an update of the company's progress. For individual investors, today's closing price relative to yesterday's close represents the change in their net worth. For corporations, the closing price is used throughout the mutual fund industry to valuate a fund; it's also used by conglomerates to value their holdings. Our interpretation of our net worth and the health of our economy is largely influenced by the closing prices of our major global markets.

On days with key economic reports, such as the Federal Reserve Bank's release of quarterly announcements of gross domestic product, the emphasis on the market close is particularly heightened. How investors interpret a key piece of economic information is influential to our perspective on the prevailing climate, and the market close helps us differentiate good news from bad. After the release of unemployment data, if the market closes in positive territory, we interpret investors' sentiments to have improved.

In most global markets, the market close is the busiest time of the day. On an average day, the final minutes of the trading session can represent anywhere from 5–10 percent of the day's trading activity. Institutional investors, even if liquidity were sufficient to complete their orders in ...