Passive investing churns market close

Phenomenon has been driven by flow of capital into index and exchange-traded funds

The rise of passive investing on Wall Street has concentrated stock market action in the final moments of the trading day — exacerbating steep, last-minute nosedives in stock values with increasing frequency.

Analysts say the trend could leave markets exposed to greater volatility when the current bull market eventually draws to an end.

“Over the last 15 years, we have seen volumes spike near the end of the day,” said Howard Silverblatt, a longtime analyst for S&P Dow Jones Indices.

Last-minute trading spurts have hit record levels. This year on the New York Stock Exchange and the Nasdaq, 22 per cent of trades were concluded in the final half-hour of each day, on average, according to Investment Technology Group (ITG).

That is up from 19 per cent in 2014.

‘Gravitational effect’

The phenomenon has been driven by the flow of capital into index funds and exchange-traded funds (ETFs), so-called passive investments that track market-weighted indices or portfolios.

Such funds have experienced a boom in recent years, offering investors higher yields than traditional trading while at the same time saving on management fees.

Valued at $800 billion (Dh2.93 trillion) in 2008, ETFs and others have since reached $5 trillion worldwide, according to JPMorgan Chase.

One quirk, however, is that the funds make market moves in the day’s final moments. “They match their benchmark typically at the close so they are trying to be as close to the close as possible,” said ITG managing director Doug Clark.

Silverblatt added that passive investments were not meant to be trading instruments: “So if you want to buy it, you will buy or sell it today, but it gets executed at an endof-day price,” he said.

With their rise, such funds have had a “gravitational effect,” with volume swelling around them, according to Brett Manning, an analyst at Briefing.com.