London Stock Exchange (LSE) is to launch a midday auction in late 2015 following feedback from buy-side firms.
Following a consultation launched in March this year, the LSE has been working closely with buy-side firms to refine plans for an intraday auction.
Originally proposed to take place at 14:00, the planned auction will now take place at 12:00 each day for two minutes, resulting in a pause in regular trading.
LSE said it has spent the past few months revalidating its initial conversations with institutional investors to give its broker members confidence in the new auction.
Brian Schwieger, head of equities at LSE, said, “Initially we proposed a 14:00 auction because this is seen as the natural start of the afternoon trading period. However, during the consultation we spoke to buy-siders to challenge this thinking and found that a midday auction would actually be preferable.”
Key reasons for choosing midday over 14:00 are that many UK funds benchmark at 12:00, meaning more trading based off the benchmarking could take place. Additionally, Germany’s Deutsche Börse already runs an auction at this time.
“What we’d like to see in the long-term is a harmonised, pan-European midday auction,” explained Schwieger, “We hope this will encourage other exchanges to also look at intraday auctions as a way of improving block liquidity.”
In contrast to its opening and closing auctions, the midday auction will only publish level 1 data during the call period, omitting level 2 data. Schwieger said investors has been concerned that publishing level 2 data would reveal large orders made during the auction and result in information leakage that could disadvantage investors making block orders during the afternoon trading session.
Buy-siders noted they will be reliant on their brokers providing algorithms and DMA access in order to use the new auction. Most brokers estimated that it will take approximately three months to get their technology ready for the changes.
“We’re giving market participants plenty of time to get ready for this by integrating it into our next scheduled technology upgrade in summer next year,” added Schwieger.
In the meantime, further consulatation on the impact the intraday auction will other auctions, such as its monthly expiry auction, will be carried out.
LSE sees the auction as being part of its wider block liquidity strategy, which includes the recent launch of the Block Discovery services on the Turquoise multilateral trading facility that it holds a majority stake in. It intends for the midday auction to service the post-MiFID II block trading needs of the buy-side by enabling them to trade in size despite new limitations on dark pool trading.