Innovation is sorely needed to assist the huge growth in equity traders taking advantage of liquidity available at close of day auctions, delegates at today’s Trade Tech conference have heard.
The close of day auction accounts for as much 20% to 30% of daily equity volume in many markets but technology has not kept pace with the increase in trading from active managers capitalising on the liquidity created by passive managers rebalancing portfolios at the end of the day.
Simon Gallagher, head of cash and derivatives at Euronext, said that while the vast majority of trades are completed in the continuous session, the “disproportionate impact” of trades conducted at close necessitates innovation.
“Liquidity providers say they’re making up 20 to 25% in the continuous session and that literally falls to below 1% in the close, but if those trades are having a disproportionate impact on then that is a discussion that we need to have. The close has not had the same big innovations as the continuous session.”
He added: “There is nothing bad about innovating. We as market operators need to ask ourselves some serious questions. Do we have the right parameters? Is five minutes too long? Should it be three minutes, two minutes?”
Gallagher conceded that exchanges were not making enough data available to help traders ‘optimise their algorithms’ and pledged to open channels for greater information sharing.
Gallagher also said that while Euronext had kept fees at close stable for 10 years, the exchange was open to reviewing costs.
“We are very flexible to fee volume elasticity around the close,” he said.
Brian Gallagher, head of electronic trading at Exane BNP Paribas, welcomed the possibility of a price review.
“[Fees at close] are something you should look at. If you look at the exchanges’ cost models, the liquidity is coming your way, you have both sides of the trade and you have a virtual monopoly.”
James Hilton, head of sales, EMEA, for Advanced Execution Services, agreed that costs needed to be looked at.
“Some of the price differentials are very substantial. You get six times as much trading at close of auction depending on which pricing level you are on,” Hilton said.
Debating innovation at the close, the panellists were wary of the push to ‘trade at last’, which Jeremy Ellis, head of equity trading for Europe at T Rowe Price, said could be a regressive step.
“I’ve heard my peers on the buy side talk about the ease of enter the trade at last process is not there and I know a lot of work is being done on that. But I’d say that comes with a health warning. Here we are in Mental Health Awareness Week when we talk about reducing market hours but actually, we’re extending them with trade at last. I don’t see that as a great step forward. It is not helpful from a diversity perspective either.”
