[ T H O U G H T L E A D E R S H I P | B E R E N B E R G ] closing mechanisms seemed a logical progression . With two MTFs and now six bank solutions , an estimated 10 % of the ¤ 9bn in daily closing auction volume is now off-exchange .
Advocates of these new mechanisms believe that the added benefit of matching orders pre-close reduces market impact and improves benchmark tracking . Critics maintain reservations that decentralising liquidity in the auction will ultimately lead to price dislocation and increased volatility . Despite the newfound fragmentation , the net effect is that auction volumes are at 2019 levels . Understanding the closing mechanisms ’ impact over time will require an in-depth analysis of all three trading phases : last continuous , closing auction , and next day open .
New venues have lowered trading costs Market participants are faced with the task of assessing whether technology integration costs outweigh the performance benefits of connecting or trading new venues . Data suggests that recent innovations have lowered trading costs for investors .
The Aquis Lit MTF , which prohibits aggressive HFT proprietary order flow , has grown from 2 % to over 6 % of the lit order book in four years whilst having a 25 % less mark-out when compared to the other three lit MTFs postexecution . Despite early scrutiny , the periodic auctions have been embraced by market participants as their anti-latency arbitrage mechanisms and prioritisation features have resulted in the second-best mark-out performance ( 0.15bp w / 5.5bp spread ) of any venue category in Europe ( after Dark LIS ). Given their success ,
Jason Rand , global head of electronic trading and distribution , Berenberg
Cboe is now seeking approval from the SEC to bring periodic auctions to US equities .
Addressing the power imbalance Not equitable , just reasonable The imbalance of pricing power enjoyed by exchanges and technology vendors is perhaps the crux of the issue . With profit margins between 20 to 100 times the costs of production , it ’ s obvious why two of the largest OMS / EMS vendors recently sold for a total of $ 4 billion , whereas two of the largest global agency brokers sold for just $ 1.7 billion , combined .
The stratospheric market data costs of exchanges in recent years are at odds with the spirit of their privatisation in the 1990s . Although it pointed to an era of greater efficiency and competition , the increased subscription costs , complex licensing agreements and a near 250 % rise in chargeable items have achieved quite the opposite .
Buy- and sell-side participants remain captive to pricing structures that they are helpless to change .
The perceived value : it ’ s less than realised As commission rates have fallen by nearly 50 % in the last decade , technology and vendor costs have grown substantially as a percentage of total costs . In some cases , OMS / EMS transaction fees on FIX lines are as high as 0.5bp and can account for much as 30 % of the gross commission and 50 % of the net commission .
Unfortunately , this pricing structure becomes prohibitive in obtaining best execution , as buy-side clients are forced to trade with brokers with greater cost efficiencies than those who can deliver the best trading outcome .
Furthermore , there is a disconnect between the perceived commission that a buy-side client is paying and the realised value a broker is receiving . The consequence is then that buy-side clients are forced to reduce their broker lists and concentrate their commissions on fewer brokers in order to maintain service levels . For small and midsized companies which require diversification of offerings , most will be significantly challenged by this dilemma . OMS / EMS transaction costs are disproportionate relative to commission rates and ultimately inhibit buy- and sell-side relationships .
A way forward If socialising costs are out , surely collaboration is in The success of the financial markets is often the bi-product of a healthy ecosystem where all market participants compete to deliver customer value , fairly . Short of regulators enforcing new pricing measures , market data and technology fees must be more representative of their production costs and be more in line with today ’ s market dynamics .
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