The LSE’s consultation closes on 17 April and the results will be published in May. A go-live date is not expected until at least Autumn 2014 to give market participants time to prepare.
The buy-side has welcomed London Stock Exchange (LSE) plans to introduce an intra-day auction, but brokers warn algorithms and smart order routers will need time to adapt.
In March, the LSE launched a consultation on implementing an intra-day auction to take place at 2pm on both its Stock Exchange Electronic Trading System and International Order Book.
Brian Schwieger, head of equities at LSE, said so far the response from the buy-side has been hugely positive.
“When I joined the LSE in September, we began touring both the buy- and sell-side to discuss a number of ideas we had to extend the range of trading tools at their disposal and one of the things many buy-siders wanted to see was an auction in the middle of the day,” he told theTRADEnews.com.
One buy-side trader, Fabien Oreve, global head of trading at Candriam Investors Group, said auctions play a vital role in managing order flow through the day and enabling block trades.
“In a typical trading day, the market may lack depth in the morning and so you start trading in a dark pool, then in the afternoon as the urgency to complete the order increases you would go to the lit exchange and finish off by trading in the closing auction,” he explained. “Adding in an auction in the middle of the day is useful as it enables you to trade a block from the order before looking at how to trade the order toward the end of the afternoon.”
LSE’s own research found the average size of a trading during its closing auction is £30,000 compared to just £6,000 during continuous trading, indicating the important role of auctions in facilitating blocks.
However, sell-side firms have been more cautious, according to Schwieger, as the addition of a new auction would require considerable revisions of their smart order routing and algorithmic trading technology.
Since European politicians confirmed that MiFID II will contain caps on dark pool use, at 4% for an individual venue and 8% across Europe as a whole, Schwieger asserts sell-side firms are exploring a range of tools to help their clients to trade in size, including auctions.
“Once the double caps on dark trading in MiFID were confirmed, it acted as a catalyst on the introduction of the intra-day auction,” Schwieger said. “Many of the most liquid names risk being ineligible for the reference price waiver, meaning the buy-side will want to trade these in blocks. Since then we’ve had some very productive discussions with the sell-side.”
BATS Chi-X Europe has also confirmed to theTRADEnews.com that it is strongly considering introducing its own auction. The pan-European trading venue became a regulated investment exchange (RIE) last year, having previously operated as a multilateral trading facility and only able to offer continuous trading.
According to a spokesperson, the firm is currently focused on how best to offer an auction without a detrimental impact on liquidity during the trading day.