With MIFID II on the horizon, various venues are seeking alternative solutions to achieve the regulators goal of larger trade sizes (more block trading) and less dark pool trading. The London intraday auction launched recently, with mixed results. FTSE 100 auction volumes are lower than expected; FTSE 250 is roughly in line with expectations (albeit inconsistent across days). Blocks do get traded in the mid cap stocks. In general, LSE has been more successful in attracting liquidity in mid cap stocks. We looked at FTSE 100 (Large Cap) and FTSE 250 (Mid Cap) stocks and what percentage of daily volume got traded in the intraday auction (one month post launch). Below is a brief summary of our findings. The full analysis is available for download:
WHAT IS THE INTRADAY AUCTION
The London Stock Exchange (LSE) launched an intraday auction on the 21st of March, 2016, for stocks trading on the SETS order book, which takes place daily at mid-day. We looked at FTSE 100 (large cap) and FTSE 250 (mid cap) stocks and what percentage of daily volume got traded in the intraday auction (one month post launch). The volume that would have traded on the exchange during that period 12:00 to 12:02 could either a) be traded on other venues, b) transferred to the auction, c) attract actual block trading or, d) be redistributed through the rest of the continuous trading period.
FTSE 100: The benchmark is based on continuous trading (volume profile) is 0.238% of daily volume. In reality we find that 0.094% of daily volume traded. That is, the actual auction percentage was around 40% of expectation because the volume got redistributed, since there is very little trading on the alternative venues during the auction period (Figure 1).
Figure 1. Distribution of auction percentage across stocks in the FTSE 100
FTSE 250: The benchmark is based on continuous trading (volume profile) and is 0.243% of daily volume. In reality we find that 0.18% of daily volume traded. The actual auction percentage was around 75% of expectation because the volume got redistributed. Removing outliers by using a median value lowers this to 54% of expectation.
Figure 2. Auction % over time (one month after launch)
Auction price: We compared the auction price to the last traded price during continous on the primary and found that on average the auction price can be 1.7 spread multiples away for the FTSE 100 and 1.52 times for the FTSE 250 respectively.
Bid-ask spread: The MTF consolidated spread during the auction period is 9.53 bps for FTSE 100, compared to a daily value of 5.42 on the primary (index values). The spread can be double the normal values.
Figure 3: Example MTF spread
Trades: There is very little trading on the MTFs during this interval; the median number of trades is 6 only compared to 29 in the week before the auction launch (same time interval). Similarly, the median shares traded is around 2000 compared to 11,000 in the week before.
MTF prices: We find strong evidence that the MTF participants take their reference prices from the primary. During the auction interval, the price at the MTFs (mid-quote) and the theoretical price published by the primary can diverge significantly (see figure 4).
Figure 4. MTF prices diverge from the primary
Displayed Liquidity: We find that during the auction period, the top of the book displayed liquidity is substantially lower compared to continuous trading (see figure 5). This implies that the market impact from trading is higher during this period on the MTFs.
Figure 5. MTF liquidity is low
ALTERNATIVE TRADING VENUES:
TURQUOISE, CHI-X & BATS
Our research shows that these venues, that have increasingly taken market share away from the primary, are not totally independent of the primary. Therefore they are not good places to trade during the intraday trading halt on the primary.