Rise of closing auctions stirs worries in European stock markets
Skip to main content
  • Home
  • Economy
  • Stocks
  • Analysis
  • World+Biz
  • Sports
  • Splash
  • Features
  • Videos
  • Long Read
  • Games
  • Epaper
  • More
    • COVID-19
    • Bangladesh
    • Infograph
    • Interviews
    • Offbeat
    • Thoughts
    • Podcast
    • Quiz
    • Tech
    • Subscribe
    • Archive
    • Trial By Trivia
    • Magazine
    • Supplement
  • বাংলা
The Business Standard
TUESDAY, MAY 17, 2022
TUESDAY, MAY 17, 2022
  • Home
  • Economy
  • Stocks
  • Analysis
  • World+Biz
  • Sports
  • Splash
  • Features
  • Videos
  • Long Read
  • Games
  • Epaper
  • More
    • COVID-19
    • Bangladesh
    • Infograph
    • Interviews
    • Offbeat
    • Thoughts
    • Podcast
    • Quiz
    • Tech
    • Subscribe
    • Archive
    • Trial By Trivia
    • Magazine
    • Supplement
  • বাংলা
Rise of closing auctions stirs worries in European stock markets

World+Biz

Reuters
18 August, 2019, 08:55 am
Last modified: 18 August, 2019, 09:10 am

Related News

  • Bank investment accounts for less than 5% of DSE market capitalisation
  • Shares drop as stubborn US inflation stokes worries on rates, economy
  • Asian stocks hit 2-year low on rate hike worries
  • Opening session sees investors' impulse pulling indices in green
  • Stocks cower as dollar marches to two-decade highs

Rise of closing auctions stirs worries in European stock markets

The growing popularity of passive and index-tracking funds and tougher regulations are driving the shift, which is draining liquidity in the $11.1 trillion market and raising concerns about big price swings.

Reuters
18 August, 2019, 08:55 am
Last modified: 18 August, 2019, 09:10 am
The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, August 16, 2019/ Reuters
The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, August 16, 2019/ Reuters

The final five minutes of trading have become the busiest time of day for stock market traders in Europe.

Aside from an initial burst of activity after the open in the morning followed by a brief flurry when Wall Street opens, a growing portion of the daily equity volumes is now concentrated into the five-minute closing auctions at the end of the day.

The growing popularity of passive and index-tracking funds and tougher regulations are driving the shift, which is draining liquidity in the $11.1 trillion market and raising concerns about big price swings and possible disruption to price discovery.

The trend is also fracturing the industry as rivals look to take a slice of the action by launching their own post-close trading products. If sustained, it will likely stir the debate about whether there is even a need in the long term for an elongated trading day.

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

Equity ETFs in Europe have ballooned in recent years and are now worth about 500 billion euro ($558 billion). That’s up more than 8% in the first half of the year and a whopping 38% from January 2017, according to Morningstar data.

With their rise, the five-minute window between 1530 and 1535 GMT each day is capturing a bigger portion of daily volume, which averaged about 70 billion euros in June.

Closing auctions across Europe’s major bourses have on average accounted for 20% of daily average volumes in the first half of this year, and hit their highest on record of 23% in June, according to Rosenblatt Securities which tracks volumes.

That’s up from just 13% three years ago. There is a similar trend in the United States, where activity is also clustering in the auctions.

Activity typically spikes in the final month of each quarter, as funds scramble to participate in the auctions that set the value of their investments for the quarter.

This year though, there has been a pronounced and steady rise each month as banks, brokers and asset managers find the auctions provide the deepest pool of liquidity.

“The rest of the day is meaningless and you can’t see flow,” said Andrea Vismara, chief executive office at Italian boutique investment bank Equita.

The jump has been particularly noticeable this year as overall trading volumes have slowed amid tighter regulation and rising costs and as investors have in general shunned equities even as prices have soared.

Onerous paperwork imposed by the EU Markets in Financial Instruments Directive (MiFID II), which came into force early last year, has also helped drive the shift. The reporting process for regulatory purposes is simpler if trading is executed at the closing auction.

The trend has drawn the scrutiny of the French market regulator Autorite des Marches Financiers (AMF), which warned last month that lower liquidity may distort price-setting mechanisms and increase price swings.

Closing auctions on Euronext's (ENX.PA) Paris blue-chip CAC 40 stock index .FCHI account for as much as 40% of volume, it found.

“The associated risks are a deterioration in price formation and liquidity during trading sessions, not to mention the operational vulnerabilities at the end of the day given the volumes concentrated in the closing auction,” the watchdog said in its report.

Liquidity Begets Liquidity
 
While it’s not clear if it has yet disrupted price formation, interviews with a dozen traders and senior executives at international banks, brokerages, wealth managers and exchanges show that the trend is upending how they do business.

For a start, liquidity begets liquidity - as more traffic goes through the closing auction, it has a self-amplifying effect.

“In many cases, volumes in the closing auctions are so significant they cannot be ignored,” said Derek McCole, head of equity dealing for EMEA at Aberdeen Standard Investments.

He has adjusted to the new norm. He tends to place a percentage of an order at the settlement price in the closing auction and then opportunistically trade the rest of the order if a certain price is hit.

But some executives say it is getting more difficult to do big block trades during the day, forcing many to save large transactions until the end of the day. That leads to even lower liquidity during the remaining 8-1/2 hours.

“The market opens, nothing happens and then the U.S. come in. It’s busy for the first hour and then it quietens down,” said a senior executive at a global bank.

“People are struggling to get orders done. If people are looking for blocks, they wait until the closing auction.”

Rare Source of Revenue

For exchange operators like Deutsche Boerse (DB1Gn.DE) and the London Stock Exchange (LSE.L), the rise of closing auctions provides a rare and much-needed source of revenue.

The exchanges often charge higher fees to transact in the closing auction compared with intraday levels. Each bourse has a different fee structure so it’s hard to pinpoint an exact premium.

But signs have emerged that the financial industry is divided over the trend, with CBOE Europe and Aquis Exchange (AQX.L) launching rival platforms to break the exchanges’ monopoly.

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

Aquis Chief Executive Alasdair Haynes said he wants his company’s Market at Close product to provide competition to the exchanges. He estimates the fees for closing auctions are costing the industry an extra 75-100 million pounds each year.

The product got UK regulatory approval a few years ago, but it has only seen volume pick up in recent weeks, a spokeswoman said.

That rise in interest has come as banks aim to slash costs due to razor-thin margins, which have been eroded by the burden of extra regulation and lower volumes.

“There is no doubt there is a correlation with banks trying to save money and the interest in our product where there’s a serious cost reduction for the banks,” Haynes said.

But the Aquis and CBOE foray has, in turn, stirred worries about drawing liquidity away from the main exchanges.

“There’s a perception that the exchanges exploit their monopoly position for the closing auctions, so the lower fees offered by alternative products may be attractive for brokers,” said Rosenblatt Securities’ market structure analyst for Europe, Anish Puarr.

But “there may be a danger in fragmenting” liquidity in the auctions, which provide a vitally important official closing price, he said.

Investors like Equita and Aberdeen are also worried that alternatives could attract volumes away from closing auctions, distorting price creation.

“As these different ways of trading the close appear, that could potentially weaken the existing closing structure if liquidity gravitates away from the primary market onto these other mechanisms,” said McCole.

Economy / Top News

European stock market / Stock Market

Comments

While most comments will be posted if they are on-topic and not abusive, moderation decisions are subjective. Published comments are readers’ own views and The Business Standard does not endorse any of the readers’ comments.

Top Stories

  • Photo: PID
    Prioritise dev projects, spend wisely: PM Hasina 
  • Workers carry sacks of wheat for sifting at a grain mill on the outskirts of Ahmedabad, India, May 16, 2022. REUTERS/Amit Dave
    India to allow wheat shipments awaiting customs clearance
  • Govt fixes tolls for Padma Bridge
    Govt fixes tolls for Padma Bridge

MOST VIEWED

  • 
A general a view of the Rumaila oil field in Basra, Iraq on 28 November 2017. Photo: Reuters
    Iraq balks at greater Chinese control of its oilfields
  • A wounded service member of Ukrainian forces from the besieged Azovstal steel mill in Mariupol is transported on a stretcher out of a bus, which arrived under escort of the pro-Russian military in the course of Ukraine-Russia conflict in Novoazovsk, Ukraine on 16 May 2022. Photo: Reuters
    More than 250 Ukrainian troops surrender as Kyiv orders Mariupol to yield
  • Indonesian palm oil farmers take part in a protest demanding the government to end the palm oil export ban, outside the Coordinating Ministry of Economic Affairs office, in Jakarta, Indonesia on 17 May 2022. Photo: Reuters
    Indonesian farmers protest against rising cost of palm oil export ban
  • Flags of European Union and Finland fly outside the Finnish embassy in Moscow, Russia March 29, 2018. REUTERS/Maxim Shemetov
    Russia to expel two Finnish diplomats in tit-for-tat move
  • Russian President Vladimir Putin attends a meeting of the leaders of the Collective Security Treaty Organization (CSTO) member states, at the Kremlin in Moscow, Russia May 16, 2022. Alexander Nemenov/Pool via REUTERS
    Putin sees no threat from NATO expansion, warns against military build-up
  • Labourers wearing masks shift wheat crop from a trolley to remove dust from the crop at a wholesale grain market during an extended nationwide lockdown to slow the spreading of coronavirus disease (COVID-19) in Chandigarh, India April 17, 2020. REUTERS/Ajay Verma/Files
    US envoy urges India to ‘reconsider’ wheat export ban: ‘Will worsen...’

Related News

  • Bank investment accounts for less than 5% of DSE market capitalisation
  • Shares drop as stubborn US inflation stokes worries on rates, economy
  • Asian stocks hit 2-year low on rate hike worries
  • Opening session sees investors' impulse pulling indices in green
  • Stocks cower as dollar marches to two-decade highs

Features

Despite Bangladesh having about 24,000 km of waterways, only a few hundred kilometres are covered by commercial launch services. Photo: Saad Abdullah

Utilising waterways: When common home-goers show the way

4h | Panorama
Illustration: TBS

How Putin revived Nato

6h | Panorama
The reception is a volumetric box-shaped room that has two glass walls on both the front and back ends and the other two walls are adorned with interior plants, wood and aluminium screens. Photo: Noor-A-Alam

The United House: Living and working inside nature

6h | Habitat
Pcycle team members at a waste management orientation event. Photo: Courtesy

Pcycle: Turning waste from bins into beautiful crafts

7h | Panorama

More Videos from TBS

Can your coworker be your closest friend?

Can your coworker be your closest friend?

7h | Videos
The mystery behind Pyramid

The mystery behind Pyramid

8h | Videos
Finland, Sweden decide to join NATO

Finland, Sweden decide to join NATO

19h | Videos
Where you can swim for Tk5

Where you can swim for Tk5

21h | Videos

Most Read

1
Representative Photo: Pixabay.
Bangladesh

Microplastics found in 5 local sugar brands

2
Mushfiq Mobarak. Photo: Noor-A-Alam
Panorama

Meet the Yale professor who anchors his research in Bangladesh and scales up interventions globally

3
Impact of falling taka against US dollar
Banking

Taka losing more value as global currency market volatility persists

4
Govt tightens belt to relieve reserve
Economy

Govt tightens belt to relieve reserve

5
Union Capital asked to return Tk100cr FDR to BATBC 
Banking

Union Capital asked to return Tk100cr FDR to BATBC 

6
How Bangladesh can achieve edible oil self-sufficiency with local alternatives
Bazaar

How Bangladesh can achieve edible oil self-sufficiency with local alternatives

The Business Standard
Top
  • Home
  • Entertainment
  • Sports
  • About Us
  • Bangladesh
  • International
  • Privacy Policy
  • Comment Policy
  • Contact Us
  • Economy
  • Sitemap
  • RSS

Contact Us

The Business Standard

Main Office -4/A, Eskaton Garden, Dhaka- 1000

Phone: +8801847 416158 - 59

Send Opinion articles to - oped.tbs@gmail.com

For advertisement- sales@tbsnews.net

Copyright © 2022 THE BUSINESS STANDARD All rights reserved. Technical Partner: RSI Lab