Auction Volumes Surge Before MiFID II

Shanny Basar

Volumes in the periodic auction books at Cboe Europe Equities and Nasdaq Nordic have set records ahead of new European Union rules which will change trading from tomorrow.

MiFID II comes into force on January 3 and will change market structure in the region and the way that many asset classes are traded. For example, there will be new venues and double volume caps on dark pool trading with exemptions for large-in-scale (LIS) trades above a certain size as specified by the European Securities and Markets Authority. MiFID II also bans broker crossing networks so if a broker has two client orders that can be potentially matched, the trade has to be executed on a regulated market rather than being crossed internally. As a result, ways to trade large blocks effectively will become more valuable.

Cboe Europe Equities launched a periodic auction book in October 2015 to help trade in larger sizes due to the potential changes from MiFID II. Trading in the periodic auction is in a lit book so the MiFID II dark volume caps do not apply. On its two-year anniversary the  Cboe Periodic Auctions book reported record volume in October 2017 with an average daily value traded of €27.3m ($33m) and an average trade size of €11,482.

Volumes continued to increase in November and December. Last month average daily value traded in the Cboe Periodic Auctions book was €37.5m, up 41.8% from November. Today the Periodic Auctions book set a daily record of €85.6m.

Dave Howson, Cboe Europe

David Howson, chief operating officer of Cboe Europe, said in a statement last October: “With the broker crossing networks shutting down and the double volume caps coming into force under MiFID II, Cboe LIS and the Cboe Periodic Auctions book offer market participants a place to conduct their trading activity with minimal market impact.”

In June last year Nasdaq announced the launch of Auction on Demand, which was designed to meet MiFID II transparency requirements. The Auction on Demand order book runs in parallel to Nasdaq’s Nordic lit order books. A trader can place an order at any time for a periodic auction and when a match is found an auction uncross is triggered, and price and volume are made public.

Volumes for Auction on Demand have been increasing steadily since launch and doubled between October and November. December set a record with volumes more than trebling from November.

Lauri Rosendahl, senior vice president for European equities and president of Nasdaq Nordic, cold Markets Media in September: “The hidden diamond in our services is that we introduced large-in-scale functionality in 2010 with our new INET trading platform. The buyside is increasingly interested in auction on demand and LIS trading as the cash equities landscape changes in Europe.”

Auction on Demand is currently available for equity trading on Nasdaq Nordic markets in Sweden, Denmark, Helsinki and Iceland and the exchange is looking into expanding the product across Europe.

Last September Turquoise, the pan-European MTF owned by the London Stock Exchange, also said it plans to launch frequent transparent auctions. Turquoise Lit Auctions will be triggered when Turquoise receives matching orders from its members.

ITG, the independent broker, also announced plans to launch POSIT Auction, a new lit segment on the POSIT MTF which will run periodic auctions for matching opportunities submitted to the POSIT Auction order book.

Duncan Higgins, head of electronic products for ITG in Europe, Middle East and Africa, told Markets Media in September: “We looked closely at the other auctions in the market and Post Auction differs because of the controls we have put in place to protect traders during price discovery, including price collars, limit and peg order types.”

Higgins continued that Posit Auction will have broker priority and will also run for 25 minutes after market close.

Christian Voigt, senior regulatory adviser at Fidessa, said in a blog in April last year that trading in auctions will grow under MiFID II, due to the technicalities in the pre-trade transparency regime and its waivers.

Voigt said: “Obviously all these matching models differ in terms of timeline, scope, legal and technical implementation, but their existence is evidence of our industry’s ability to keep innovating in the face of new regulation. With so much choice on offer it is now up to the market to pick its favourites.”

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