Flat-by-Close Rules and Overnight Risk Budgets

A "flat-by-close" mandate simply means a strategy must end each trading day with zero net position — every share bought must be sold, every short covered, before the close. This eliminates overnight risk entirely for that book: no gap risk from earnings, no reaction to overnight news, no exposure while markets are shut and liquidity can't be accessed. It's the standard constraint for pure intraday statistical-arbitrage and market-making books, where the edge comes from short-lived patterns that carry no expected benefit from being held overnight anyway, only extra unhedgeable risk.

Many desks aren't purely intraday, though, and need a middle ground: instead of a blanket flat-by-close rule, they're given an explicit overnight risk budget — a capped dollar or volatility allowance for whatever exposure they carry past the close, sized far smaller than the intraday budget precisely because overnight moves (news, other markets moving while the position can't be adjusted) tend to be larger relative to the time elapsed than an equivalent stretch of trading-hours risk. A desk might run $10 million of intraday value-at-risk but be capped at $1 million overnight, forcing it to trim most of the day's position before the close even if it isn't required to go fully flat.

Concretely: a stat-arb desk running $10 million of intraday risk but only a $500,000 overnight budget must reduce roughly 95% of its position before the close bell, keeping only whatever slice fits inside that smaller overnight allowance.