LONDON (Reuters) – The last five minutes of trading have become the busiest time of day for stock market traders in Europe.
FILE PHOTO: The German stock price index DAX graph is depicted on the stock exchange in Frankfurt, Germany, August 1
Except for a first burst of activity after opening in the morning followed by a brief surge when Wall Street opens, a growing portion of daily stock volumes are now concentrated to the five-minute closing auctions at the end of the day.
The growing popularity of passive and index-tracking funds and tougher regulations is driving the shift, which is losing liquidity in the $ 11.1 trillion market and raising concerns about large price fluctuations and possible disruption in price discovery.
The trend is also cracking the industry, as competitors seem to be taking part in the action by launching their own trading products up close. If it is maintained, it will likely spark the debate over whether there is even a long-term need for an elongated trading day.
Products such as ETFs and hedge funds typically use today's prices that were set during the closing auctions for their daily pricing.
ETFs in Europe have ballooned in recent years and are now worth around 500 billion euros ($ 558 billion). That's more than 8% in the first half and a full 38% from January 2017, according to Morningstar data.
With its increase, the five-minute window between 1530 and 1535 GMT each day captures a larger portion of the daily volume, which averaged around € 70 billion in June.
Closing auctions of Europe's largest bourses accounted for an average of 20% of daily average volume during the first half of this year, hitting its highest on record of 23% in June, according to Rosenblatt Securities, which tracks the volumes.
That's up from just 13% three years ago. There is a similar trend in the US, where the activity is also collected in the auctions.
Activity typically increases in the last month of each quarter, as funds strive to participate in auctions that value their investments for the quarter.
But this year there has been a significant and steady increase each month as banks, brokers and asset managers think the auctions provide the deepest pool of liquidity.
"The rest of the day is meaningless and you can't see the flow," said Andrea Vismara, CEO of the Italian retail investment bank Equita.
The jump has been particularly noticeable this year as overall trading volumes have declined amid tighter regulation and rising costs, and as investors have generally declined stocks even though prices have risen.
Demanding papers imposed by the EU Markets in Financial Instruments Directive (MiFID II), which came into force early last year, have also helped drive the shift. The reporting process for regulatory purposes is easier if trading is conducted at the closing auction.
The trend has drawn scrutiny by French market regulator Autorite des Marches Financiers (AMF), which warned last month that lower liquidity could distort pricing mechanisms and increase price fluctuations.
Closing auctions on Euronext & # 39; s ( ENX.PA ) Paris blue-chip CAC 40 stock index .CHCHI accounts for as much as 40% of the 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.
GRAPHICS: Final auction volume – here.png
LIQUIDITY BETTER LIQUIDITY
While it is not clear whether it has yet disturbed price formation, interviews with a dozen traders and top executives in international banks, brokers, asset managers and stock exchanges show The trend is increasing how they do business.
For starters, liquidity gains liquidity – as more traffic goes through the closing auction, it has a self-reinforcing effect.
"In many cases, the volume of the closing auctions is so important that they cannot be ignored," said Derek McCole, head of EMEA Equity Trading at Aberdeen Standard Investments.
He has adapted to the new norm. He tends to place a percentage of an order at the auction 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 becoming more difficult to do big block trading during the day, forcing many to save big transactions until the end of the day. This results in even lower liquidity over the remaining 8-1 / 2 hours.
"The market opens, nothing happens and then the United States comes in. It's busy for the first hour, and then it gets quieter," said a top executive of a global bank.
“People are struggling to get orders. If people are looking for blocks, they wait for the closing auction. ”
RARE SOURCE OF REVENUE
For stock market operators such as Deutsche Boerse ( DB1Gn.DE ) and the London Stock Exchange ( LSE.L ), the increase in closing auctions provides a rare and badly needed source of income.
The stock exchange often takes higher fees to trade in the closing auction compared to intraday levels. Each bourse has a different fee structure, so it is difficult to find an exact premium.
But there have been signs that the financial industry has split over the trend, with CBOE Europe and Aquis Exchange ( AQX.L ) launching competing platforms to break the stock exchange's monopoly.
CBOE says they will not charge customers until the end of the year to use their 3C product, while Aquis requires a fixed £ 10,000 subscription.
Aquis CEO Alasdair Haynes said he wants the company's market at Close to provide competition to the stock exchanges. He estimates that closing auction fees cost the industry another £ 75-100 million each year.
The product received approval from the UK a few years ago, but it has only seen volume increase in recent weeks, a spokeswoman said.
The increase in interest has come as banks aim to reduce costs due to picky margins, which are eroded by the burden of extra regulation and lower volume.
"There is no doubt that there is a connection with banks trying to save money and interest in our product where there is a significant cost reduction for banks," Haynes said.
However, Aquis and the CBOE trial have raised concerns about withdrawing liquidity from the main stock exchanges.
"It is believed that the stock exchanges are taking advantage of their monopoly position for closing auctions, so the lower fees offered by alternative products may be attractive to brokers," said Rosenblatt Securities & # 39; Market Structure Analyst for Europe, Anish Puarr.
But "there could be a danger of fragmenting" liquidity in the auctions, which provides a very important official closing price, he said.
Investors such as Equita and Aberdeen are also concerned that alternatives may attract volume from closing auctions and distorting price creation.
"Given these different ways of trading up close, it could potentially weaken the existing closing structure if liquidity pulls away from the primary market on these other mechanisms," McCole said.
($ 1 = 0.8950 euros)
Reporting by Josephine Mason; additional reporting by Simon Jessop in LONDON and Inti Landauro in PARIS; Editing by Hugh Lawson