[ I N - D E P T H
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C L O S I N G
where the market has been during
continuous trading, because it
can be heavily skewed by buy/
sell imbalances. The trader has to
surrender a degree of control and
take the closing price the market
uncrosses at if they have to be
filled. Any surrendering of control
produces an increased risk.”
France’s AMF conducted its own
study on the rise of closing auctions
earlier this year, focusing on the
trend’s potentially detrimental
effect on price formation. While it
did not find definite proof that the
rise of closing auctions undermined
prices during the day, the AMF did
flag increased potential for 'flash
crashes' and operational risks for
traders engaging in increasingly
large end of day trading sessions.
In one example, the AMF ref-
erenced an incident in May 2018
whereby a trader wanted to exe-
cute a buy/sell-back transaction on
3.5 million shares, but triggered Eu-
ronext’s circuit breaker. The trader
tried to reduce the size to 2 million
shares, but only had time to enter
the buy order. The error resulted
in a ¤2.2 million loss, with multiple
market participants impacted by
the event.
Healthy competition
Aquis Exchange launched its own
alternative closing auction mecha-
nism in 2016, but has only this year
gathered substantial interest from
the market in light of the shift of
activity towards the close. Known
as Market at Close, or MaC, the
mechanism allows traders to exe-
cute orders at the official closing
A U C T I O N S ]
“With less room to transact large positions
intraday, more participants are turning to
alternative mechanisms and ultimately closing
auctions to execute their trades.”
DAVID HOWSON, COO, CBOE EUROPE
price only.
Aquis founder Haynes says it
is the only European exchange
importing the official closing price
of the listing-exchanges across
the region in a bid to establish and
create liquidity. But, perhaps more
importantly, MaC aims to reduce
costs for market participants and
bring competition to the market
which national exchanges have re-
tained a monopoly over. Cboe’s 3C
mechanism is also free to use until
1 July 2020, which Howson says
was a strategic move to encourage
competition in the space, but to
also show traders that engaging at
the close doesn’t always have to
cost more.
Healthy competition in the Eu-
ropean equity market is important
in terms of ensuring services are
well-priced and innovative, but
as closing auction volumes are
concentrated on just a few venues
in Europe, some exchanges have
seized the opportunity and raised
prices for participating in end of
day trading.
“The product is all about reduc-
ing costs whereas almost every
other product we have is about en-
hancing liquidity. Getting the same
for less is a very attractive result,
and that’s what is important about
this,” Haynes says. “I really don’t
“Nobody out there can actually tell whether this
trend is structural or cyclical. What we do know
is that more business is being conducted in the
close than ever in the past.”
ALASDAIR HAYNES, CEO AND FOUNDER, AQUIS EXCHANGE
54 // TheTrade // Winter 2019
like the fact that [national exchang-
es] have a complete monopoly on
what the official closing price is,
given the fact that the market is
healthily fragmented, in my opin-
ion, to have competition whereby
prices, spreads and costs of trading
have all fallen over the past few
years. There should be competition
at the close, and that shouldn’t be
just about the price. Everybody
who has significant liquidity at the
close should be pooled together
to create a better closing auction
which involves all parties con-
cerned in the industry.”
There are some advantages for
traders using the closing auctions
and, of course, they have been
a positive development for the
industry in terms of proper price
discovery and valuing funds cor-
rectly. Trading in closing auctions
can also remove the ‘crossing the
spread’ cost of trading for both the
buyer and sellers as they meet at
the same price.
However, it is unclear how much
more volumes will shift to the end
of the trading day, and with the ef-
fects of the trend already being felt
on the buy-side trading desk, it is
clear why market participants are
expressing concern on the subject.
At the same time, the monopoly
that national stock exchanges hold
over the closing auction and the
official closing price adds to the
complex debate. After all, it does
seem strange that as the industry
benefits from having strong com-
petition and multiple venues for
trading intraday, there is just the
one venue for the close.