What Is Market on Close?
A market on close (MOC) order is a type of market order that an investor or trader places to buy or sell a security at the closing price of a trading day on a stock exchange. As a type of Order Type, MOC orders are executed during the closing auction, which is a specific period at the end of the trading session where final prices are determined. Unlike typical market orders that are executed immediately at the best available price during continuous trading, a market on close order is held until the very end of the trading day and is guaranteed to be filled at the official closing price, regardless of what that price might be. This order type is particularly useful for participants who want to ensure their trades are settled at the definitive end-of-day price.
History and Origin
The concept of executing orders at the market's close has evolved with the structure of financial markets. Historically, trading floors, such as that of the New York Stock Exchange (NYSE), conducted closing "call auctions" where specialists or designated market makers would aggregate buy and sell interest to determine the final closing price for each security. This method provided a transparent mechanism for price discovery at the end of the day.
Over time, as trading became more automated and electronic, the auction system evolved to handle larger volumes and more complex order types. The NYSE, for example, has adapted its closing auction to a hybrid system that combines technology with human oversight, continuing to be a crucial event in the US equity market. The formalization of specific closing order types like market on close has been a response to the increasing demand for end-of-day certainty, particularly from institutional investors. The official trading hours themselves have also changed over the centuries, with the NYSE establishing a consistent 10:00 a.m. to 4:00 p.m. schedule by October 1974, influencing the timing of the market on close process.17
Key Takeaways
- A market on close (MOC) order instructs a broker to buy or sell a security at the official closing price of the trading day.
- MOC orders are guaranteed to be executed, but the exact execution price is not known until the market closes.
- These orders are commonly used by institutional investors, index funds, and arbitrageurs for purposes such as rebalancing or tracking closing benchmarks.
- The execution of MOC orders occurs during a specific closing auction process on stock exchanges.
- They differ from other order types, such as limit orders, which specify a maximum or minimum acceptable price.
Interpreting the Market on Close
A market on close order is interpreted as an instruction to prioritize execution at the final closing price, regardless of fluctuations leading up to that point. When an investor places a market on close order, they are essentially signaling a strong desire for immediate liquidity at the close, accepting whatever the determined closing price may be.
The concentration of trading interest in the closing auction, driven by MOC orders and other closing-only order types, plays a significant role in price discovery. The aggregated demand and supply from these orders contribute to the determination of the official closing price, which is often a critical benchmark for valuing portfolios and calculating daily performance. A large influx of market on close orders on one side of the market (buy or sell) can indicate significant institutional activity or a strong directional bias towards the end of the day.
Hypothetical Example
Imagine an investor, Sarah, wants to ensure she owns exactly 100 shares of TechCorp (TCHP) at the end of the trading day, regardless of the final price, to align her portfolio with a specific index. Throughout the day, TCHP has been trading between 102. At 3:55 PM ET, with the market closing at 4:00 PM ET, Sarah places a market on close buy order for 100 shares of TCHP.
As the closing auction approaches, a large volume of buy and sell orders, including other MOC orders, are aggregated. Let's say the final auction process determines the closing price of TCHP to be 101.50 per share, meaning her total cost for the 100 shares will be $$10,150. The execution price for her market orders is determined solely by the outcome of the closing auction, not by any intermediate prices during the continuous trading session.
Practical Applications
Market on close orders are essential tools for various market participants due to their specific execution characteristics.
- Index Tracking and Rebalancing: Many exchange-traded funds (ETFs) and mutual funds are designed to track specific market indices. Since these indices often use the official closing prices of their constituent stocks for their daily calculations and rebalancing, fund managers frequently use market on close orders to buy or sell securities, ensuring their portfolio management aligns precisely with the index's composition at the end of the day. This reduces tracking error.
- Institutional Trading: Large institutional investors often use MOC orders to execute significant block trades without disrupting the market during continuous trading hours. By consolidating their orders into the closing auction, they can achieve better liquidity and often a more favorable average price for large volumes. The NYSE's closing auction, for instance, often handles hundreds of millions of shares, providing deep liquidity for these orders.15, 16
- Arbitrage Strategies: Traders employing arbitrage strategies might use market on close orders to capitalize on price discrepancies between different markets or related securities that are resolved at the close.
- Regulatory Compliance and Price Dissemination: Regulators, such as the U.S. Securities and Exchange Commission (SEC), have rules governing the dissemination of market information, including bids and offers. Rule 602 of Regulation NMS requires exchanges to make best bids and offers publicly available, and this extends to the transparency and efficiency of closing price mechanisms, which market on close orders contribute to.12, 13, 14
Limitations and Criticisms
While market on close orders offer certainty of execution at the final price, they come with certain limitations and criticisms:
- Price Uncertainty: The primary drawback for an investor placing a market on close order is the uncertainty of the final execution price. Unlike a limit orders, which sets a maximum or minimum price, an MOC order will be filled at whatever price is determined by the closing auction, even if that price is significantly different from the last traded price before the close.
- Potential for Imbalance and Volatility: A large, unexpected influx of market on close buy or sell orders can create a significant regulatory imbalance at the close, potentially leading to increased market volatility or larger price swings in the final moments of trading. While closing auctions are designed to handle these imbalances, extreme cases can cause sharp price movements. Academic research has explored how market structures, including auction mechanisms, can influence volatility.8, 9, 10, 11
- Vulnerability to Manipulation (Historically): In the past, concentrated order flow near the close was sometimes perceived as a potential area for manipulation or "marking the close" to influence closing prices. However, stringent regulations and enhanced oversight by exchanges and bodies like the SEC, along with increased transparency in the closing auction process, aim to mitigate such risks.6, 7
Market on Close vs. Limit on Close
Market on close (MOC) and limit on close (LOC) orders are both types of closing orders used in the final auction of a trading day, but they differ fundamentally in their price constraints and execution guarantees.
| Feature | Market On Close (MOC) | Limit On Close (LOC) |
|---|---|---|
| Price | Guaranteed execution at the official closing price. | Executed at the closing price, if it meets or betters the specified limit price. |
| Execution | Guaranteed execution. | Not guaranteed; may not execute if the closing price falls outside the specified limit. |
| Flexibility | No price control; prioritize certainty of fill. | Price control; prioritize price over certainty of fill. |
| Risk | Price risk (unknown final price). | Execution risk (potential for no fill). |
An MOC order ensures that a trade will be completed at the close, regardless of the final price. This is ideal for investors who prioritize full execution and adherence to a closing benchmark, such as for index rebalancing or large institutional trades where getting the volume done is paramount. In contrast, an LOC order offers price protection; the order will only execute if the determined closing price is at or better than the specified limit. If the closing price moves unfavorably beyond the limit, the LOC order will not be filled. This makes LOC orders suitable for investors who are willing to risk non-execution to achieve a specific price point at the close. Both order types are typically submitted with specific cut-off times prior to the market's close.4, 5
FAQs
When can you place a market on close order?
The specific cut-off times for placing market on close orders vary by exchange. For example, on the NYSE, MOC orders generally must be entered by 3:50 p.m. ET, although there are exceptions for offsetting regulatory imbalances closer to the 4:00 p.m. ET close.3
Why do institutional investors use market on close orders?
Institutional investors, such as mutual funds and ETFs, frequently use market on close orders to align their portfolios with benchmarks that are based on official closing prices. This helps them minimize tracking error and manage large transactions efficiently within the trading volume concentrated at the close, as large orders at other times of the day could impact prices.2
Can a market on close order be canceled?
Yes, market on close orders can generally be canceled, but only up to a certain cut-off time, which is typically shortly before the market close. After this time, MOC orders usually become irrevocable to ensure an orderly closing auction system and accurate price discovery.1
How does a market on close order affect the closing price?
Market on close orders contribute to the overall supply and demand dynamics in the closing auction. A significant imbalance of buy or sell MOC orders for a particular stock can influence the final closing price, as the designated market maker or auction mechanism works to satisfy all eligible closing interest.
Are market on close orders common in all financial markets?
While closing auctions and analogous order types exist in many global stock exchanges, the specific rules, procedures, and prevalence of market on close orders can vary significantly between different markets and asset classes. The concept is most prominent in equity markets that utilize a closing auction mechanism.