Cboe Europe Defends Periodic Auctions

Shanny Basar

Mark Hemsley, president of Cboe Europe, said volumes have grown in periodic auctions because trades have lower market impact as European regulators have expressed concerns that they are being used to circumvent the new double volume caps.

MiFID II, the European Union regulations which went live at the beginning of this year, introduced double volume caps on equity trading in dark pools of 4% of total volume on a single venue in the past 12 months and 8% combined across all EU dark pools. However large-in-scale trades above a specified size and trades in periodic auctions on lit venues are both exempt from the volume caps, so their volumes have increased and are expected to continue to rise.

Hemsley told Markets Media: “The main surprise from MiFID II is how well the periodic auctions book did. Trades have had the same low impact characteristics as when volumes were lower last year.”

Cboe reported in its third quarter results that the European periodic auctions book maintained strong volume with average daily notional value reaching €1bn.

Mark Hemsley, Cboe Europe

“We managed the flow into the periodic auctions book and clamped down on certain behaviours and high-frequency techniques,” Hemsley added. “The offering was well designed and has been well managed.”

However last month Esma issued a call for evidence on periodic auctions which last for very short periods of time during the trading day and are triggered by market participants, rather than the venue. Esma said in its consultation: “Various stakeholders have approached Esma over the last months raising concerns that frequent batch auctions may be used to circumvent the double volume caps.”

Esma first published the volume caps in March and suspended more than 750 stocks from being traded in dark pools for six months. Hemsley argued that periodic auctions take place in lit books and provide a better outcome for investors.

“It is wrong to say that periodic auctions are being used to circumvent double volume caps,” he added. “They were used prior to the implementation of MiFID II because they have low market impact and are a desirable place to trade.”

Esma acknowledged that there may be other factors behind the success of periodic auctions in its consultation. The report said: “For instance, stakeholders trying to reduce the impact of factors such as speed and latency which often are important in central limit order books. It can also not be excluded that the growth in frequent batch auctions is in part attributable to activity that had previously been OTC prior to MiFID II entering into force.”

The European regulator also expressed concern that price determination may be weakened in periodic auctions. “Limitations reducing the likelihood of multiple orders confrontation (such as short duration, reduced number of orders, concentrated number of participants) may result in a suboptimal outcome for the counterparties,” said the report.

Duncan Higgins, ITG

Research from broker ITG has found that periodic auctions are still only 3% of trading, although that has risen from 1% prior to the introduction of the double volume caps.

Duncan Higgins, head of electronic products at ITG Europe, told Markets Media: “Periodic auctions have been a really positive development as they are a better way of finding liquidity in smaller size. The performance of auctions has been excellent and we hope that the regulators will recognise this as part of their review and hold off making any changes until they can gather more data.”

Block trading

Hemsley said Cboe Europe had also had a continued increase in electronic block trades this year.

The exchange said that Cboe LIS accounted for 22% of large-in-scale activity on non-displayed venues citing data analytics provider big xyt. Total notional value traded on Cboe LIS in October was a record €8bn and 0ctober 10 set a new daily record of €554m (single-counted) notional traded.

Hemsley said: “October was an exceptional month for Cboe LIS, which continued to be the fastest growing block trading platform in Europe.”


MiFID II also aimed to increase transparency through more regulatory reporting.

Hemsley said transparency has increased through quotes from systematic internalisers and better standardisation of data from MiFID II approved publication arrangement (APAs).

“The industry needs guidance from Esma on how non price-forming equity transactions should be reported,” he added. “A clearer view of addressable liquidity in SIs is also coming.”

Christian Voigt, senior regulatory adviser at Fidessa, agreed that transparency has increased, although some data could be improved.

“Even within the SIs there is more transparency than before,” Voigt added. “There is more to be done but the right questions are being asked and the industry is in full swing to make better data available.”

Best execution

MiFID II strengthened the best execution requirements and expanded the mandate from equities into other asset classes, including fixed income, for the first time.

However the majority of firms, almost 60%, have no plans to use their best execution reports internally according to a survey last month from Cappitech, a provider of regulatory technology for financial services,  In addition nearly two-thirds, 65%, of respondents do not monitor trades systematically according to best execution criteria, despite a legal obligation to comply with best execution under MiFID II.

Christian Voigt, Fidessa

Voigt questioned either the increased MiFID II reporting had been worth the effort in equities.

“However there has been a significant change in fixed income, foreign exchange and derivatives,” he said.

He continued that transaction cost analysis in these asset classes will be a focus next year as that is what customers have been asking for.

“A lot more customers are asking for evidence they have provided best execution which they can use to to show their own clients,” Voigt added.


MiFID II also requires fund managers to either pay for research themselves or set up a research payment account, where the budget has been agreed with the client. Most asset managers have opted to absorb research costs, which has led to a drop in research budgets.

Voigt said: “Unbundling has had a significant impact on research and driven a lot of change in market structure.”

In equities, brokers will be earning about 20% less on European equity research by the end 2019 as a result of MiFID II, a drop of about $300m (€265m), according to a survey from Greenwich Associates last month.

The consultancy said in a report, MiFID II at the Midpoint, that the largest European institutional investors cut budgets for external European equity research by 19% this year. In addition investors are planning another 5%-6% reduction next year.

Voigt added: “Unbundling has changed the core of the research industry and there will be more innovation and new market models.”

For example this week Nasdaq, the US exchange, announced the acquisition of Quandl, a Canadian provider of alternative and core financial data. Quandl offers a global database of alternative, financial and public data, including information on capital markets, energy, shipping, healthcare, education, demography, economics and society. Nasdaq said it plans plans to combine Quandl with its existing Analytics Hub business within Global Information Services.

Tammer Kamel, chief executive of Quandl, said in a statement: “Investors today are demanding actionable intelligence from new and expansive data sources at an increasingly rapid rate. Joining with Nasdaq will enable us to serve investors with strengthened real-time capabilities and greatly enhanced data hygiene and symbology. Our existing set of clients, including the world’s top hedge funds and investment banks, stand to benefit greatly from our mutual vision that data is going to become the primary driver of active investment performance over the next decade.”

Voigt added : “A lot of non-European firms are also looking at unbundling. The trend is going global.”

He concluded that it is still too early to judge whether MiFID II has been a success.

“It took three years for the original MiFID to reach its full potential when Chi-X (a new trading venue) became a real force,” Voigt said. “We are not even halfway through that time period with MiFID II.”

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