ETF 'closing auction rush' pressure eases, arbitrage logic may shift.

Author: Wang Hejing

With the official implementation of new A-share trading rules, ETFs have adopted an after-hours fixed-price trading mechanism, and the Shanghai-listed fund closing call has been adjusted from continuous bidding to a closing call auction. When ETFs use after-hours fixed-price trading to divert institutional rebalancing needs and alleviate supply-demand pressure at the close, and when ETF closing trades shift from "whoever sweeps the last order influences the price" to "orders are concentrated in the last three minutes and priced uniformly," industry institutions generally report that the pressure to "fight for execution" in ETF closing trades has significantly eased, and the pace of closing operations has become more relaxed.

Previously, under the continuous bidding mechanism for Shanghai-listed fund closes, even millions of yuan in funds could drive a mini ETF to its daily limit. This optimization of the closing price formation mechanism helps to some extent enhance the price stability of mini ETFs at the close. As investors shift their trading habits from rushing the close to after-hours trading, the liquidity of mini ETFs may become more continuous and real, improving the vicious cycle of "being weak due to small size and becoming smaller due to weakness." At the same time, the new trading rules shift ETF arbitrage logic from "a game of speed and manipulation" to "a game of pricing ability and liquidity," benefiting long-term market fairness and efficiency.

After-hours trading volume is relatively small

On July 6, the first day of the new A-share trading rules, the closing trading mechanism for on-exchange funds was adjusted accordingly.

From the perspective of trading mechanism changes: On one hand, the after-hours fixed-price trading mechanism, previously applicable only to STAR Market and ChiNext stocks, has been extended to all A-shares and ETFs. The after-hours fixed-price trading period is from 15:05 to 15:30 each trading day, and the trading system matches closing price orders on a time-priority basis, executing at the day's closing price. The Shanghai Stock Exchange accepts closing price orders from trading participants from 9:30 to 11:30 and 13:00 to 15:30 each trading day; the Shenzhen Stock Exchange's after-hours fixed-price trading order period is from 9:15 to 11:30 and 13:00 to 15:30.

On the other hand, the trading method for Shanghai-listed funds during the closing phase has been adjusted from continuous bidding to a closing call auction, with the closing price determined through the call auction, consistent with stocks. This adjustment helps further improve price stability and pricing efficiency during the fund closing phase, enhancing market mechanism consistency. The closing call auction period is from 14:57 to 15:00.

On the first day of the new rules, CITIC Securities Research Institute observed that on July 6, A-share ETF after-hours trading volume was 56 million yuan, with a relatively large proportion of popular industry-themed ETFs. Overseas stock ETFs and Hong Kong stock ETFs traded 12 million yuan and 14 million yuan after hours, respectively. Thematic ETFs such as China-Korea Semiconductor, ChiNext, Communications, Hong Kong Securities, and Semiconductor Materials & Equipment saw higher after-hours trading volumes.

CITIC Securities Research also noted that the average transaction value per order in after-hours ETF trading on July 6 was only 8k yuan, suggesting possible significant participation by individual investors.

More relaxed operational pace

Before the new trading rules took effect, mini ETFs occasionally experienced abnormal price surges during the closing phase, with instances where just millions of yuan in funds could push a mini ETF to its daily limit.

A director of the index investment department at a Shanghai-based public fund told China Securities Journal: "Such ETFs not only have small sizes but also few market participants, resulting in relatively scarce liquidity. Previously, Shanghai-listed funds used continuous bidding in the last three minutes, with real-time trade execution and the ability to place and cancel orders at any time. The closing price was the volume-weighted average price of all trades in the minute before the last trade (including the last trade), making it easy for a small amount of funds to cause significant fluctuations in mini ETFs."

Moreover, considering market making, Yu Zhanchang, Assistant General Manager of the Index and Quantitative Investment Department and fund manager at Penghua Fund, mentioned that because A-share stocks enter the closing call auction in the last three minutes and cannot be traded continuously, while ETFs are still trading continuously, hedging difficulty increases. Market makers become more cautious, spreads may widen, and mini ETFs, which already have low trading volumes and shallow order books, see this problem further amplified.

The new trading rules adjust Shanghai-listed funds from continuous bidding to a closing call auction. In the view of Guotai Fund, this optimizes the closing price formation mechanism and, to some extent, helps enhance the price stability of mini ETFs at the close. Meanwhile, the adoption of after-hours fixed-price trading for ETFs, where all orders are executed at the day's closing price, can shift closing trading demand to after-hours execution, providing a channel for block orders and potentially reducing pressure at the close.

By observing the closing structure of some ETFs on the first day of the new rules, Yu Zhanchang noted typical changes: "The trading pattern of mini ETFs changed; after 14:57, there were no more continuous trades at the closing. At 14:58 and 14:59, many mini ETFs showed zero trading volume; the closing trade shifted from 'whoever sweeps the last order influences the price' to 'orders are concentrated in the last three minutes and priced uniformly.'"

A public fund insider in East China believes that the new trading rules raise the threshold for manipulation of the close through the irrevocable order mechanism of the closing call auction, reconstructing fair pricing logic. At the same time, after-hours fixed-price trading diverts institutional rebalancing needs and eases supply-demand pressure at the close. The combination forms a constraint. It can be seen that the pressure to "fight for execution" in ETF closing trades has significantly eased, abnormal fluctuations have decreased, and the price curve has become smoother. "With the addition of an after-hours trading window, investors no longer need to crowd orders into the last few minutes before the close. They can execute trades at the closing price through after-hours trading. This not only makes the operational pace at the close noticeably more relaxed but also reduces the risk of overnight price gaps."

Beneficial for long-term market fairness and efficiency

Previously, during the continuous bidding phase for Shanghai-listed fund closes, a small amount of money could push up or down the closing price of mini ETFs, creating opportunities for some funds to arbitrage using distorted closing prices.

China Securities Journal learned from the industry that some funds took advantage of the thin order books of mini ETFs, quickly creating premiums or discounts during the continuous trading in the last three minutes to sweep orders for arbitrage; they fought for execution in the last three minutes based on IOPV levels or prices of similar ETFs, capturing instantaneous premium/discount repairs at the close; they influenced the final transaction price, closing price, or technical signals through small trades; they bet on the price deviation caused by the last few trades being corrected the next day, capturing closing opportunities.

When the closing trading mechanism for Shanghai-listed funds and A-shares is unified as a closing call auction, Yu Zhanchang said that market makers and arbitrage funds are more likely to quote around the expected closing price, and closing spreads and abnormal jumps are expected to narrow. Moreover, because the closing call auction aggregates buy and sell orders for funds within three minutes and matches them according to uniform rules, the influence of a single order decreases. Arbitrage strategies that relied on continuous bidding during the Shanghai-listed fund close will be significantly suppressed, while new arbitrage strategies such as closing call auction imbalances and after-hours fixed-price liquidity may emerge.

However, Yu Zhanchang cautioned that this change in trading mechanisms does not mean the complete elimination of abnormal ETF closing movements: "If mini ETFs lack sufficient counterparties, the call auction may show little or no trading; if there is a severe imbalance between buying and selling, the closing price may still jump. The new mechanism addresses the problem of closing prices being amplified by a small amount of continuous trades."

Nevertheless, as investor trading habits shift from rushing the close to after-hours trading, some industry insiders believe that mini ETF prices may become more continuous and real, helping to attract medium- to long-term allocation funds and breaking the vicious cycle of "being weak due to small size and becoming smaller due to weakness." At the same time, the new trading rules shift ETF arbitrage logic from "a game of speed and manipulation" to "a game of pricing ability and liquidity," benefiting long-term market fairness and efficiency.

(Editor: Xu Nannan)

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