David Howson, chief operating officer at Cboe Europe said the exchange is not looking to undermine the price forming process in the listing market closing auction but wants to give customers more choice after continuous trading has ended.

Howson explained that the share of daily trading in closing auctions in Europe has risen from 10% to 12% a few years ago to around 20% to 25%.

“As volumes have grown in the close there continues to be little viable competition and some exchanges have been able to increase prices for data and execution,” Howson added.

He explained that one of the reasons for the increase is the rise of passive investment as exchange-trade funds need the closing price. Additionally, closing volumes have been boosted by algorithmic trading strategies that mirror the daily volume profile and this year’s risk-off environment. As volumes and volatility have been low it has become harder to hide a large intra-day trade, so some funds prefer to hit the end of day benchmark.

Last week the exchange announced plans to launch Cboe Closing Cross (3C) on 16 August 2019 across 18 European markets and will be free until the end of the year. 3C is independent from the listing exchange and does not use their closing auction price.

“We’re not aiming to undermine the price forming business done in the listing market closing auction as everyone accepts that is a valuable process,” said Howson.

pic.twitter.com/pBj8rjkh0a

— Cboe (@CBOE) July 31, 2019

After the continuous trading session has ended market participants input a price in the 3C session between 16:30 UK time and 17:15pm. There is a volume maximising cross every minute during the 45-minute 3C session.

“We have designed the auction to give customers the opportunity to choose the prices they wish to trade at after the continuous trading session has ended,” Howson added. “Clients input an ‘at limit’ order and it sits in the book until it is matched by natural opposing flow at each crossing event, although they also have the option to  amend the price at any point.”

Cboe said the 3C session will provide full order book transparency and all market participants are able to see in real-time the price and size/quantity for all price levels that is predicted to execute in the cross.

Howson continued that 3C will appeal to clients who need to get the closing price, particularly those who can afford to wait or to speculate without turning to the over the counter market. In addition, in thin markets it can also be hard to shift a large block in European hours and 3C will be running after the close of the primary market.

“We are aiming to be a one stop shop for the close across Europe,” he added. “It will take time to build liquidity, but given the high volumes taking place after continuous market trading has ended, if 3C is able to attract a small proportion of that flow, that will be an achievement.”

Competitors 

Aquis Exchange launched a closing cross in 2016 and Turquoise, London Stock Exchange’s MTF, is due to launch Turquoise Plato Market-On-Close through its venture with Plato Partnership, the non-profit sell side and buy side organisation.

Tim Cave, an analyst at consultancy Tabb Group, said in a report that 3C does not appear to be an out-and-out competitor to the close in the same way as Turquoise and Aquis.

@CBOE and @tradeturquoise are bringing competition to Europe's closing auctions: here's how their approaches match up https://t.co/1encAYEr2n via @TabbFORUM

— Tim Cave (@_TimCave) July 31, 2019

“It does offer the opportunity to trade at the closing price, making it useful for orders that missed out on the close, Cave added. “But others might be unwilling to use it for closing price activity without knowing they have both sides of a trade.”

Cave continued that 3C’s differentiator is that participants can choose their price for execution for up to 45 minutes after other markets have closed, allowing them to trade around after-hours events and possibly encourage more liquidity from the US.

“However, there historically has been minimal amounts of trading during this point of the day, and further extending the trading day, which is already eight and a half hours long in Europe, could prove challenging,” added Cave. “The fact that it also runs alongside the closing auctions for its first five minutes may lead to concerns that it is drawing limit orders away from the primary auction and potentially distort prices – if volumes reach a certain level.”

However, he concluded that the challenge to closing auctions may be more successful than previous attempts. A Tabb Group survey in April found that 80% of buy-side traders would support a change to put some form of competitive pressure on closing auctions and reduce reliance on a single auction.

“With both fees and closing auction volumes increasing, the desire in the industry for a competitively priced alternative has reached a tipping point,” said Cave. “The concerns are not just about closing auction fees, but also around the challenges of participating in auctions that have become so big.”