The exchange, which accounts for about a quarter of all European equity trading, in October 2015 launched a periodic auction book that holds a series of very short auctions throughout the day.
It was the first order book of its type in Europe, and was designed to lure larger trades because orders are prioritised according to their price and size, rather than by the time they arrive on the system.
Users are currently unable to state a minimum acceptable quantity – or MAQ – on orders, a feature common on most dark pools and considered key by many buyside firms when trading in size.
However, Bats Europe is seeking regulatory approval for the functionality to allow its users to stipulate an MAQ, which it hopes to introduce in the fourth quarter of 2016, according to David Howson, the exchange’s chief operating officer.
Howson told FN: “This was not something we did initially, given we were launching a brand new way of trading and we did not see it as a crucial feature to a non-continuous auction mechanism. However, we have been asked about it so many times we determined it made sense to add the functionality.”
An MAQ order is not completed unless a user’s minimum stated quantity, or higher, is reached. However, multiple orders can fill an order so that it reaches a user’s MAQ level, unlike a minimum execution size feature, which requires a single fill.
Bats Europe, an exchange that historically has had a strong association with high-speed trading firms, launched the auction book as part of its attempt to encourage the larger orders favoured by institutional investors. In July, the exchange also announced a partnership with US block trading platform Bids Trading to launch a large-in-scale platform in Europe.
The auction book is unique because the indicative price and size of each auction event is published and, from a regulatory perspective, it is considered a lit exchange. However, it also has many characteristics of dark books and encourages larger trades because of the short duration and randomised end of each auction event, which limits the likelihood of information leakage.
This is a doubled-edged sword: it means the order book will not be subject to caps on dark pools that are being implemented as part of the revised Markets in Financial Instruments Directive, but it has proved difficult for brokers to use the service with their existing algorithms.
Howson said: “Despite being a lit venue from a regulatory standpoint, it does fit with many dark aggregation algorithms. The challenge there is that most other dark books have a minimum execution size capability quality, so we realised we had to introduce that functionality to enable seamless integration with broker algos.”
He added that 10 brokers regularly use the service, with other firms testing it. At the close of business on September 6, the order book had traded €47.9 million in volumes for the month to date, more than half that recorded in the whole of August, when it traded €93 million.
Howson said: “The process that brokers need to go through to connect to new venues is much longer than it used to be, there are a lot of due diligence and best execution committees to go through. That said, we are getting good traction, volumes are moving in the right direction and the market impact statistics remain positive.”