Esma’s Periodic Auction Review Gets Positive Response

Shanny Basar

Market participants have welcomed the European Securities and Markets Authority’s call for evidence on periodic auctions for equities, as the data gathered can then be used to influence policy.

Ben Stephens, head of EMEA business development at agency broker Instinet, told Markets Media: “There are 22 questions in the consultation. This is not a half-hearted review and Esma have done their homework.”

Last week Esma released its 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.

Steve Maijoor, Esma

Steven Maijoor, chair of Esma, said in a statement: “Using this evidence, we will assess whether they can be used to circumvent the double volume caps and other pre-trade transparency requirements under MiFID II. If Esma comes to the conclusion that frequent batch auction systems violate the spirit and the rules of MiFID II, we will develop appropriate policy responses.”

MiFID II, the regulations which went live in the European Union at the start of this year,  aimed to encourage trading on lit venues by introducing double volume caps on trading in dark pools. However, large-in-scale trading above a specified size has a waiver and the market share for electronic blocks and periodic auctions, a dark pool alternative, have grown.

Periodic auctions are different from end of day auctions as they may only last for milliseconds. In contrast while traditional auctions can last several minutes and they are scheduled by the trading venue.

Periodic auctions can be triggered by collecting trading interest throughout the day and starting a ‘call period’ every time a pair of opposing orders can be matched. Based on those offers an algorithm determines a single ‘uncrossing’ price which maximises the volume of instruments which can be executed at that price. Another frequent approach is to trigger an auction as soon as one order has been submitted.

Stephens added: “In periodic auctions there is less pre-trade transparency. In addition, if they are crossing at the midpoint then they are taking price formation away from lit venues.”

Ben Stephens, Instinet

He gave the example of the end of day auction at the London Stock Exchange. In this case LSE gives information such as whether there are more than buyers than sellers and where the price is expected to form. In addition, there have to be more than two sides for an auction to take place.

However, Stephens continued that there is a place for both end of day and intraday auctions. “There are about 29,000 equities in Europe which are not liquid for which auctions work well,” he said.

Esma acknowledged that the success of frequent batch auctions may also be driven by other factors such as investors trying to reduce the impact of factors such as speed and latency. The growth in volumes may also be partly attributable to activity that had previously been over the counter before MiFID II went live.

The regulator also said it was aware  that trading under frequent batch auctions only constitutes a small part of total trading volume. However, Esma added: “We have observed that the trend for frequent batch auction trading seems to be in a large extent driven by instruments that have been suspended under the double volume caps.”


A Cboe spokesperson said in an email: “We are pleased to see Esma taking a close look at the different functionality of the various periodic auction books. We’ve long said that not all periodic auctions books are the same and we believe that an in-depth, evidence-based and data-driven analysis will help market participants and regulators better understand these offerings.”

Christian Voigt, senior regulatory adviser at Fidessa, said in a blog that the Esma call for evidence is a useful fact-finding exercise for the wider market.

Voigt continued that periodic auctions became popular last year and have grown in volume this year so they are often linked to the introduction of MiFID II.

“While some opponents lambasted them as a cynical attempt to avoid the double volume cap, supporters have pointed out their innovative approach to fulfilling a real need amongst market participants while still being fully MiFID II compliant,” he added. “But it seems like the market has voted with its feet and significant volumes have shifted over to periodic auctions. Regardless of the outcome, this is a discussion that needs to be had.”

Stephens said national regulators may receive feedback on the call for evidence and preempt the outcome of the review by discouraging certain behaviours. “Changes in design will be quietly enacted,” he added.

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