European Exchanges Have Stranglehold On Closing Auctions
With MiFID II implementation projects now a distant memory and Brexit planning, for good or bad, nearing a denouement of sorts, Europe’s equity trading industry might soon be able to turn its attention to a long-burning issue: closing auctions.
The concentration of trading volume at the close has been a major feature of equity markets for some time, but according to “After Hours: The Rise of Europe’s Closing Auctions,” new TABB Group research by London-based TABB research analyst Tim Cave, the trend has been particularly pronounced in Europe, where closing auctions have begun to account for as much as 25% of a stock’s average daily trading volume, up from 15% at the end of 2016.
By comparison, closing auctions account for around 8% of US equity trading.
For many buy-side traders, bigger closing auctions aren’t necessarily a bad thing. “But the implications of nearly a quarter of all trading taking place in just five minutes at the end of the day are profound. They help to centralize more liquidity in a single point-in-time, maximizing price formation and volume crossed. And most senior buy-side traders speak highly about the mechanics of European closing auctions, praising their transparency, efficiency and ease of access.”
That said, in Europe – where the trading day is a monstrous eight-and-a-half hours – Cave says the impact and implications of nearly a quarter of all trading taking place in just five minutes at the end of the day are profound.
Based on in-depth interviews with senior European buy-side traders and reviewing the rise in closing volumes, its impact and the appetite for alternative closing systems, Cave examined the pros and cons of Europe’s closing auctions and possible changes, including potential alternative closing systems.
“It may be that some more radical changes are necessary to break the stranglehold that primary exchanges have on the closing auction,” he says. These include moving the calculation of the closing price to the continuous trading session where competition exists. An alternative is enforcing a fee cap on closing auction fees – but financial regulators already have shown to be reluctant to enforce price controls, as seen in the debate around market data fees under MiFID II.
Source: TABB Group
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