The London Stock Exchange Group’s (LSEG) European trading venue Turquoise has found that broker priority allocations on its periodic auction service could be as low as 0.06%.
An in-depth analysis of more than 160,000 trades executed on Turquoise Lit Auctions between May and June this year revealed that the number of trades where the same member firm was responsible for both sides of the execution accounted for 18.9%.
However, Turquoise found that the time lag between the initial resting order and contra side in those cases was on average three minutes, meaning it is likely electronic algorithmic flow meeting naturally within the service.
Just 1.5% of total activity, or 2,408 trades of the total analysed, occurred when the same member was responsible for both sides of the trade and both the buy and sell orders were received within a 100 millisecond time period.
Further analysis found that only 104 trades, or 0.06% of the total activity on Turquoise Lit Auctions, occurred with the same counterparty on both sides, within 100 milliseconds and where the buy and sell orders were the same size.
“With increased scrutiny that periodic auctions are facing in general, we’ve been keen to look at the nature of our own service and share those findings with our customers,” Scott Bradley, head of sales and marketing, LSE cash secondary markets and Turquoise, told The TRADE.
“One of the areas of debate is the addressable nature or characteristics of periodic auctions. The significant addressable activity within the Turquoise Lit Auctions is due to its consistently high multilateral nature.”
Bradley added that in Turquoise Lit Auctions an algorithm runs to maximise volume that is uncrossed, which means that if an auction is triggered and pre-trade transparency is published, the auction will operate on a ‘time priority basis’ rather than size priority.
“As we are looking to maximise volume, when initiating an auction it’s important to understand the service is truly multilateral in nature and therefore other members can join the auction price formation process which maximises volume,” he said.
Potential broker priority allocations on periodic auctions have been a topic of debate within the institutional trading community since the introduction of MiFID II. Research has suggested the majority of the buy-side agree there is a need for further regulatory scrutiny to curb broker preferencing activity on the services.
European regulators are also looking closely at periodic auctions, with the chair of the European Securities and Markets Authority (ESMA), Steven Maijoor, recently highlighting it as one specific area where improvements to MiFID II are required.
“We are trying to develop and drive an understanding of how our lit auctions work and the nature of flow that is in there. Putting things into perspective is useful, and the recent Financial Conduct Authority (FCA) report outlines how periodic auctions volumes have increased, but still represent a very small overall proportion of the market,” Bradley commented.
The FCA countered the concerns about periodic auctions of many regulators across Europe last month as volumes are considerably small compared to the rest of the market. The regulator also explained that the industry is in the early stages of MiFID II, and market participants are continuing to adapt to the new trading landscape.
“We have a responsibility to the market place to educate and remain transparent. We want to provide and allow the market to make an informed choice and decision,” Bradley concluded.