Revitalised Auctions an Alternative Answer to Search of Equity Liquidity
White Paper

Neonet Securities and LiquidMetrix have published a mutual white paper analysing the likely impacts and opportunities surrounding the introduction of intraday auctions and relating this to the proposed MiFID II restrictions on dark pools.

London Stock Exchange’s introduction of midday auction late 2015 is analysed as an example of an alternative to dark pools with comments from Brian Schwieger, Head of Equities at London Stock Exchange.

Conclusions from the white paper include:

  • Intraday auctions fulfil similar client needs of minimising market impact and maintaining confidentiality as dark pools and are therefore a credible alternative.
  • Successful intraday auctions attract a large share of the available liquidity from other execution venues during the time of the auction which can be seen during the Exchange Delivery Settlement Price (EDSP) auctions held on the London Stock Exchange.
  • Market participants will have to adapt their trading behaviour and algorithms pre and post trade to interact with and maximise the benefits offered by this new source of liquidity.

“London Stock Exchange’s intraday auctions present exciting new opportunities and challenges to current agency trading algorithms. To maximise the benefits, trading firms will need to create good pre-trade models of the expected trading volumes, spreads and liquidity before, during and after the intraday auctions. Equally importantly, firms will need good post trade analytics that give confidence that the prices and liquidity they obtained during London Stock Exchange’s auctions have contributed positively to overall algorithm performance. We are looking forward to working with our pre and post-trade clients to help them make maximum use of this new source of liquidity to improve their overall trading performance,” said Dr Darren Toulson, Head of Research at LiquidMetrix.

“We argue that the optimisation of algorithmic strategies around existing and new auctions will become an additional critical factor in the selection and segmentation of algo providers. Neonet carefully reviews the impact of additional intraday auctions on our algorithmic strategies and how to manage our algorithmic trading patterns around the auction time, examining both schedule-driven and opportunistic algorithms, which require in our view a distinct approach,” said Jan Jonsson, Head of Execution Product at Neonet.

The full white paper can be accessed here.