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Recent Orders: Rise of End Auctions Causes Concerns on European Stock Markets

LONDON (Reuters) – The last five minutes of trading have become the busiest time of day for stockbrokers in Europe.

FILE PHOTO: German Stock Price Index DAX chart was presented on the stock exchange in Frankfurt, Germany, August 1

6, 2019. Wall Street opened, a growing portion of daily stock volumes already concentrated in the five-minute closing auctions at the end of the day.

The growing popularity of passive funds and tracking indices and tighter regulations are leading to a change that drains $ 11.1 trillion in market liquidity and raises concerns about large price fluctuations and possible price disruption.

The trend is also breaking the industry as competitors look to take some action by launching their own post-closure products. If it persists, it will probably raise the debate about whether there is even a need for a long-term trading day.

Products such as exchange traded funds (ETFs) and hedge funds typically use the end-of-day prices set during the closing auctions for their daily prices.

Equity ETFs in Europe have boomed in recent years and are now worth about 500 billion euros ($ 558 billion). This is above 8% in the first half of the year and a huge 38% compared to January 2017, according to Morningstar data.

With their increase, the five-minute window between 1530 and 1535 GMT each day occupies most of the daily volume, which averages around 70 billion euros in June.

The closing auctions on major European exchanges represented an average of 20% of average daily volumes in the first half of this year, peaking at 23% in June, according to Rosenblatt Securities, which tracks volumes.

This was only 13% three years ago. There is a similar trend in the United States, where activity is also being auctioned.

Activity typically increases in the last month of each quarter, as funds are raised to participate in auctions that determine the value of their investments for the quarter.

This year, however, there is a clear and steady rise each month as banks, brokers and asset managers discover that auctions provide the deepest liquidity.

"The rest of the day is pointless and you can't see the flow," says Andrea Wismara, CEO of Italian boutique investment bank Equita.

The jump was particularly noticeable this year, as total trading volumes slowed amid tighter regulations and rising costs, and as investors generally strayed from stocks, even as prices rose.

Heavy documentation imposed by the EU MiFID II Marketplace, which came into force early last year, also helped drive the change. The reporting process for regulatory purposes is simpler if trading takes place at the final auction.

The trend caught the attention of French market regulator Autorite des Marches Financiers (AMF), who last month warned that lower liquidity could disrupt pricing mechanisms and increase price volatility.

Euronext CAC 40 Stock Exchange Final Index auctions ( ENX.PA ) Paris Blue Chips. CACIs represent 40% of the volume.

"The risks involved are a deterioration in pricing and liquidity during trading sessions, not to mention operational vulnerabilities at the end of the day, given the volumes concentrated in the closing auction," the watchdog said in his report.

GRAPHIC: Auction closing volumes – here.png


Although it is unclear whether price distortions, interviews with a dozen traders and senior executives in international affairs, still broke, The wealth and exchanges show that the trend is increasing as they do their business.

To begin with, liquidity generates liquidity – as more traffic passes through the closing auction, it has a self-reinforcing effect.

"In many cases, closing auction volumes are so significant that they cannot be ignored," says Derek McCall, EMEA's head of equities at Aberdeen Standard Investments.

He adapted to the new norm. He is inclined to place a percentage of the settlement price order in the closing auction and then opportunistically trade the rest of the order if a certain price is reached.

But some executives say it's harder to make big block deals during the day, forcing many to save big transactions by the end of the day. This leads to even lower liquidity over the remaining 8-1 / 2 hours.

"The market opens, nothing happens and then the US enters. It's busy for the first hour and then calms down," a senior executive at a global bank said.

"People are racing to fulfill orders. If people search for blocks, they wait until the final auction. ”


For stockbrokers such as Deutsche Boerse ( DB1Gn.DE ) and the London Stock Exchange ( LSE.L ) and a much needed source of revenue.

Exchanges often charge higher closing fees than the intraday levels. Each exchange has a different fee structure, so it is difficult to determine the exact premium.

But there were signs that the financial industry was split over the trend, with CBOE Europe and Aquis Exchange ( AQX.L ) launching competitive platforms to smash the stock market monopoly.

CBOE says it will not charge customers until the end of the year to use their 3C product, while Aquis charges a fixed subscription of 10,000 pounds.

Aquis CEO Alasdair Haynes stated that he wanted the market for his company Close to Close to compete on the exchanges. He estimates the auction closing fees cost the industry an extra £ 75-100 million each year.

Several years ago, the product received UK approval, but in recent weeks there has been an increase in volume, a spokeswoman said.

This interest rate hike has occurred as banks seek to reduce costs due to thin margins that are shattered by the burden of additional regulation and lower volumes.

"There is no doubt that there is a connection with banks that try to save money and interest in our product when there is a serious reduction in bank costs," Haines says.

But the incursions of Aquis and CBOE in turn alarmed concerns about liquidity withdrawals from major exchanges.

"It is understood that exchanges use their monopoly position for closing auctions, so that lower fees offered by alternative products may be attractive to brokers," said Rosenblatt Securities market analyst for Europe Anish Poiré.

But "there may be a risk of fragmentation" of liquidity in auctions that provide a vital official closing price, he said.

Investors such as Equita and Aberdeen also worry that alternatives may draw volumes away from closing auctions, distorting pricing.

"As these different ways of trading close ones emerge, this could potentially weaken the existing closing structure if liquidity gravitates from the primary market to these other mechanisms," McCall says.

($ 1 = 0.8950 euros)

Report by Josephine Mason; additional reporting by Simon Jessop at LONDON and Inti Landauro at PARIS; Editing by Hugh Lawson

Our Standards: The Thomson Reuters Principles of Trust.

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