Bats Chi-X Europe Adds To Auction Innovation
Bats Chi-X Europe has become the latest exchange to help fund managers trade large blocks with the launch of a periodic auction throughout the trading day.
As the number of equity trading venues has increased in European, competition has increased and led to tighter bid-offer spreads but average trade sizes have shrunk.
David Howson, chief operating officer of Bats Chi-X Europe, told Markets Media that the exchange will launch a new book – the periodic auctions book – which will be completely separate from its two existing order books. It is possible that some of the liquidity in the new book could be diverted from Bats Chi-X Europe’s existing books but Howson hopes total volumes at the exchange will increase.
“Liquidity may come from the order books of other venues,” he said.
Neonet Securities and LiquidMetrix, the analytics firm, said in a white paper on auctions in April : “With the focus of buy and sell side communities on MiFID II, intraday auctions may provide an alternative option in the perennial search for liquidity. They could also provide an alternative to dark pool trading, especially as such trading is set to be capped under the new MiFID II proposals.”
Alan Kasket of Neonet Securites London told Markets Media: “As an independent agency broker we welcome initiatives that offer investors new tools in their quest for liquidity. The periodic auction on first sight looks to be a sensible initiative and the ball is in our court as market participants to help achieve its aims for trading large blocks with minimum market impact or information leakage.”
In the periodic auctions book, trades will be allocated in order of price and size and not time. Mark Hemsley, chief executive of Bats Chi-X Europe said in a statement: “The periodic auctions book responds to the specific needs of participants to trade regularly in size. In that respect, its launch represents a new frontier in European order book trading.”
Auctions will last a randomised time of between 100 milliseconds and five minutes, depending on liquidity of the individual stock. A new auction begins as soon as one ends so that a stock is always in auction. The new book should make it easier to trade in large sizes but there is no minimum order size when the service launches on 19 October.
Howson said: “ Orders of any size will be allowed as we seed the platform but, once we are live, we will look to optimise size and fills in the new order book.”
In order to maintain orderly markets while stocks are being continuously auctioned, matches will only be allowed within a European Best Bid and Offer (EBBO) price range so investors get the best price available across Europe markets.
“The key value proposition is pricing within the EBBO,” added Howson. “The price is truly based on the liquidity at that time in the auction.”
Kasket said: “Pricing within the EBBO is very important to protect the customer from receiving a price that is untypical of the market as a whole. This protective measure also makes it harder to game the auction.”
Trading in large size is likely to become more difficult in Europe when the new MiFID II regulations place caps on volumes of dark pool trading from 2017 of 4% in any one stock on any dark venue and 8% of total volume across European dark venues. Howson said that trading in the periodic auction will be a lit book and subject to pre-trade and post-trade transparency, so the dark volume caps will not apply.
To help trade large blocks the London Stock Exchange has also announced plans to offer a new auction at noon, matching the intraday auction in Germany.
Aquis Exchange, the subscription-based venue, has also launched a new order type to give members cheaper access to closing auctions across Europe. The order also avoids the MiFID II volume caps as trading will be on lit venues and meet all pre- and post-trade transparency requirements.
“We will examine the BATS initiative carefully to ensure our clients will benefit from participation,” added Kasket. “We were at the forefront of offering direct access to Turquoise Uncross and plan to participate in the periodic auction if it makes sense for our clients.”
Last year Turquoise, the London Stock Exchange’s pan-European multilateral trading facility, launched Block Discovery which was designed to bring together large block orders in random intra-day auctions. For example, in a liquid stock the cross occurs randomly every five to 10 seconds while for a less liquid stock the random period can increase to between five and 45 seconds.
Turquoise is in discussion with Plato Partnership, the new not-for-profit consortium which is aiming to launch a trading venue for large blocks.
Bats Chi-X Europe argued that Turquoise matches trades at a prevailing, albeit random, market price rather than pricing trades via a standard European auctions process. Howson said: “We made a very purposeful decision to split our auctions capacity from our continuous trading books. It seems entirely counterintuitive to us to interrupt the continuous trading with a scheduled auction.”
Featured image by BlueSkyImages/Dollar Photo Club
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