Senior buy-siders have agreed that regulators should consider tightening the rules around periodic auctions to improve transparency and reduce broker-preferencing.
A poll of heads of trading and dealing at asset management firms across Liquidnet’s member network found that almost 70% generally support periodic auctions following the introduction of the double volume caps (DVCs) for dark trading in March.
However, half of respondents recognised the need for further regulatory tightening of periodic auctions, particularly around transparency and broker-preferencing, as it can be difficult to distinguish between addressable and non-addressable liquidity. Regulators have also expressed similar concerns and have said that in some ways the venue type is circumnavigating the rules under MiFID II.
“We don’t use periodics at the moment as it is difficult to identify what is attainable liquidity,” said one senior buy-sider, while another added that “without knowing the level of addressable liquidity, any price transparency is meaningless”.
The use of periodic auctions – which have seen a surge in volumes since DVCs were implemented – was widely debated at this year’s TradeTech Europe conference in Paris. Major exchange operators including the London Stock Exchange Group and Cboe Europe, claimed pre-matched activity on auctions has been overstated.
Chairman of the Autorité des Marchés Financiers,Robert Ophéle, targeted Cboe Europe’s periodic auction during a keynote address, stating his concerns about how the industry currently views periodic auctions as lit venues and calling into question the level of transparency these venues provide.
“Periodic auctions are considered to be lit trades, but the level of transparency is indeed very limited. There is practically no pre-trade transparency and no means of fully understanding the order book,” Ophéle said at the time.
“The auction duration is unknown and the European Best Bid and Offer (EBBO) provides the corridor where all trades are executed, so one could be led to believe that many trades on periodic auctions are actually pre-arranged trades.”
Of those surveyed, 54% said they are in favour of implementing a minimum order size in periodic auctions, and 49% said a minimum pre-matched period based on the liquidity of the instrument should be introduced.
Liquidnet’s report also found that 88% of senior buy-siders believe the shift towards block trading under MiFID II has been a positive outcome of regime. It said that while regulatory focus has remains on lit price formation, a key challenge for asset managers is uncovering liquidity given the need to execute in size.
Rebecca Healey, head of market structure for EMEA at Liquidnet and author of the report, explained that under MiFID II various methods of execution for the buy-side, including block trading and periodic auctions venues, is crucial.
“The argument for trading sub-LIS (large in scale) orders in the dark may be just as valid for those asset managers looking to improve execution performance for a portfolio rebalancing or when facilitating institutional crosses,” Healey commented.
“The reality is that asset managers need multiple methods of execution available given the variety of orders, differing market conditions, and execution objectives required. Hence the rise in use of periodic auctions and SIs as alternative methods of sourcing liquidity.”