ITG Adds to Auction Innovation
Broker ITG is adding to the innovations around auctions as new regulations will limit the volume of equities trading in dark pools in the European Union and change the sourcing of liquidity.
MiFID II, the regulations coming into force in January 2018, place volume caps on trading of 4% of daily volume in an individual stock on any single dark venue as well as 8% of total average daily volume across all European dark pools. There are waivers for large-in-scale orders and trading in auctions.
ITG aims to launch Posit Auction In the fourth quarter of this year, a new lit segment on the broker’s Posit multi-lateral trading facility. Posit Auction will run periodic auctions, of between 50 and 100 milliseconds, where there are opportunities for matching orders in the new lit segment. The randomised length of auctions makes it harder for them to be targeted by aggressive trading strategies.
Duncan Higgins, head of electronic products for ITG in Europe, Middle East and Africa told Markets Media: “We looked closely at the other auctions in the market and Post Auction differs because of the controls we have put in place to protect traders during price discovery, including price collars, limit and peg order types.”
Christian Voigt, senior regulatory adviser at Fidessa, said in a blog in April this year that trading in auctions will grow under MiFID II, due to the technicalities in the pre-trade transparency regime and its waivers.
Voigt added that some exchanges are using auctions in a straightforward setup to execute firm orders – such as Nasdaq’s Auction on Demand in Copenhagen, Helsinki, Iceland and Stockholm and Bats Europe’s Periodic Auctions. Nasdaq launched auction on demand in the Nordics in June this year. Bats Europe launched periodic auctions in 2015 and added a minimum acceptable quantity feature last year.
“The obvious difference between them is in their names – Bats follows a periodic schedule, while Nasdaq will trigger auctions dynamically – but the really interesting differentiator is the priority when allocating the execution volume,” said Voigt. “While Bats applies the classical logic of price / size / time, Nasdaq offers internal (broker) / size / time. The latter implies that if a broker wants to match two orders (e.g. two different clients or client vs house) then it can do so and no other firm can step into that trade.”
Higgins continued that Posit Auction will also have broker priority. MiFID II bans broker crossing networks so if a broker has two client orders that can be potentially matched, the trade has to be executed on a regulated market rather than being crossed internally.
Other venues who have launched periodic auctions include Turquoise, the MTF owned by the London Stock Exchange Group, which has Turquoise Plato Uncross random intra-day auctions.
Higgins continued that in Posit Auction pre-trade transparency will be limited to indicative price and volume to minimise information leakage. Another difference is that Posit Auction will run for 25 minutes after market close. He added: “Our analysis of combined BCNs and MTF dark pools shows that 90% need to make changes to comply with MiFID II.”
Voigt said: “Obviously all these matching models differ in terms of timeline, scope, legal and technical implementation, but their existence is evidence of our industry’s ability to keep innovating in the face of new regulation. With so much choice on offer it is now up to the market to pick its favourites.”
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