Refocusing on auctions

BATS Chi-X Europe recently announced plans to introduce opening and closing auctions for ETFs, while the LSE plans to introduce an intraday auction for all SETS equities. Although these moves differ in instrument scope, they seem to have a common aim. The buy-side has long complained about the increasing difficulties of executing large block trades. With the new double volume caps on dark trading coming in under MIFID II – which even the regulators admit are “clunky” – matching orders which are below the Large-in-Scale threshold but still considerably above average size for the lit order books, is likely to become more difficult still.

Auctions are an interesting idea to combine regulatory and business requirements. Because they usually display only an indicative price and volume during the call phase, auctions provide less pre-trade transparency compared to continuous trading, but their positive impact on price discovery and their suitability for blocks is undisputed. As a result, auctions were not in the meddling scope of legislators when drawing up MiFID II. In some ways financial markets are like balloons; squeeze them on one side and the air just moves somewhere else. If, as a result of all that regulatory squeezing, we see more activity in auctions, then that could be one of the better outcomes for the market.