Norway’s Wealth Fund Wants More From Brokers at End of the Day

(Bloomberg) -- Norway’s $950 billion sovereign wealth fund, the world’s largest, wants brokers and exchanges to continue to develop how they manage closing auctions.

“Further development work by brokers is required, both in the forecasting of auction volume and in the order submission and signaling strategies,” Norges Bank Investment Management said in an asset manager perspective paper on Tuesday. “We see the broker offerings for closing auction order management as very much an emergent field, and welcome innovation and development in this area in the coming years.”

Norway’s fund, which owns 1.5% of the world’s listed stocks, publishes its views on the development of the financial markets on which it depends. The papers have previously covered topics such as corporate sustainability reporting and informational asymmetries in foreign exchange markets.

The fund said exchanges should review the mechanisms they use for closing auctions, which bring together market participants in the last trade of the day. Innovations such as transactions outside of the primary exchange can lead to further market fragmentation, the fund said.

The fund said that recent years’ “tremendous” increase in trades executed in closing auctions is a structural shift and not just a result of the popularity of passive investing. Closing prices in equity markets often serve as reference prices for derivative contracts and for the calculation of fund net asset values and portfolio and benchmark returns.

While exchanges have been innovative in designing closing auctions, the magnitude of the current transformation of market structure may justify a more holistic review of closing auction mechanisms, NBIM said.

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