Can Retail Traders Harm Market Efficiency? Evidence from Closing Price Auctions during COVID-19

The closing call auction is an important feature of modern markets that improves the efficiency of closing prices as a benchmark. We examine the effects of COVID-19 on closing price dislocation – with a specific focus on the role of high-frequency and retail traders on closing price dislocation and efficiency. We report that closing prices are severely dislocated and inefficient during the COVID-19 pandemic. This effect at the close is exacerbated through significant increases in retail trading activity and reduced liquidity provision and trading by high-frequency traders. Our findings have significant implications for applications which rely on efficient closing prices, such as valuing financial securities and benchmarking performance, as well as for the regulatory treatment of liquidity provision by HFTs. Our evidence also suggests that the increased participation of retail traders in financial markets may reduce overall informational efficiency.