Liquidity worries are driving traders towards alternative execution choices, according to a new survey from SIX Swiss Exchange, with traders shifting activity away from exchanges to either SIs or OTC – while dark pools continue to take volume away from lit venues.
Lack of available liquidity was the primary challenge challenge for almost half (47%) of respondents, while a quarter (24%) were also worried about lack of volatility. The survey findings showed that decreasing liquidity in continuous on-exchange trading is most likely to flow into dark pools (31%), followed by closing auctions (27%). The last event of the trading day designed to determine the closing price for each stock, over a third of overall volume across all European venues, now takes place at closing auctions.
Earlier this year, SIX released Auction Volume Discovery (AVD) – a functionality featuring a hidden order type that enables traders to execute larger orders without disclosing the size of the trade, enhancing liquidity as a result.
The survey, carried out across 2,000 European traders, also showed that they believe trading activity is shifting away from exchanges to either Systematic Internalisers (SI) or over the counter markets (OTC) with 15% and 14% of traders’ responses, respectively. But just 6% of traders are seeing liquidity moving to periodic auctions – another type of trading mechanism where securities are traded at specified intervals, rather than throughout the trading day. Growing interest in these alternative trading mechanisms follows the European Union’s second Markets in Financial Instruments Directive (MiFID) regime enforced back in 2018 – which aims to shift trading flow onto transparent venues.
Commenting on the findings, Tony Shaw, head of sales for UK & Ireland at SIX Swiss Exchange, said: “As liquidity shifts away from continuous lit trading, exchanges need to innovate to offer members additional solutions. Our non-displayed pool Swiss-At-Mid that includes block functionality, our additional session Trading-At-Last, and our Auction Volume Discovery order type all satisfy the traders’ increasing need for flexibility and have all seen growth since their respective launches.
“Volume attracts volume when it comes to European equity markets. As a single event which the entire market is focused on, end of day auctions increase the chances of traders finding much sought-after liquidity,” Shaw added. “Our most recent innovation, AVD functionality, helps to stitch side-lined liquidity together and bring it back onto the exchange.”
Other findings showed that 49% of traders claimed the FCA’s post-Brexit removal of ESMA’s double volume caps, designed to control the amount of equity trading taking place away from public exchanges, has had little impact on dark trading either way.
“Traders seem agnostic as to whether the double volume caps are in place or not, regardless of the political rhetoric,” said Shaw. “Whether its closing auctions, SI’s, block trading venues or periodic auctions, mechanisms have been in place well before Brexit to meet the persisting demand for dark trading within the industry.”
“The important thing is that there is a level playing field. Alternative mechanisms facilitate different types of interactions for a kaleidoscope of different objectives, but if it’s completely to the detriment of public orderbooks, that’s not helpful either. Fair and transparent price formation remain the lifeblood of liquid markets,” Shaw concluded.
©Markets Media Europe 2023
