The manipulation of closing prices

Before the introduction of a call auction at the close, the last minute of trading at the Paris Bourse was the most active of the whole day. Even though the bid-ask spread increased substantially, the probability of large and aggressive orders increased, as did price volatility. In addition, both the one-minute returns and the proportion of partially hidden orders increased. In this paper, we develop an agency-based model of closing price manipulation, which can account for these phenomena. In addition, we discuss the optimal closing price mechanism under manipulation.