The Paris-based operator of four European stock exchanges in Brussels, Paris, Amsterdam and Lisbon is planning to launch an amended version of its iceberg order types by the end of this year.
Iceberg orders aim to minimise the market impact of large orders on lit markets by only displaying a small portion of each order at a time. Once the displayed order is executed, it is immediately replaced on view to the market by another small order, allowing such trades to be satisified in increments.
Euronext is aiming to tap into a “major new source of hidden liquidity” by introducing three new initiatives: allowing market participants to randomise the disclosed quantity of their iceberg orders, while also allowing the hidden portion of iceberg orders to be executed against one another; the exchange group is also launching a new type of hidden order that will allow orders to be executed against each other at any price with neither the price nor size of the orders displayed.
Euronext’s move marks an attempt to capitalise on rules being introduced under Mifid II that will impose caps on the amount of trading that can take place on dark pools – trading facilities that have been historically favoured by institutional investors to carry out large orders away from the eyes of the wider market.
However, those caps will not apply to trades deemed as large-in-scale, which would apply to many iceberg orders.
Simon Gallagher, head of cash equities at Euronext, said that more than 5% of Euronext’s equity volumes were executed against iceberg orders, making them one of Europe’s “largest sources of invisible liquidity”.
He added: “There will be an execution possibility through the standard iceberg way of revealing increments of the order to the market, and Euronext will execute the order that way. More importantly, we will allow the liquidity that’s sitting there latent waiting to be executed to interact with each other under the large-in-scale waiver.”
He added that the new hidden order type would be based around the large-in-scale waiver, which could interact with the hidden part of iceberg orders.
Euronext is not the only one with a plan. On August 9, Bats Europe, the region’s largest stock exchange, partnered with US-based BIDS Trading to launch Bats LIS [large-in-scale], a new trading platform that will favour trading of big blocks of stock.
Lee Hodgkinson, Euronext’s head of markets and global sales, said the revised Markets in Financial Instruments Directive, or Mifid II – a piece of European Union regulation that will shake up market structure across the bloc after it comes into force in January 2018 – would challenge the dark trading workflows that developed around a “legitimate need for wholesale investors to get business done in size with minimal market impact”.
“Investors are looking for new ways of delivering services in the liquidity space for those legitimate needs. We’ve got quite a strong suite of approaches we’re developing to help them,” Hodgkinson said.