Nasdaq is planning to follow rival exchange Bats Europe with a new order book that will run auctions throughout the day on its European stock markets, in an attempt to allow investors to place large orders without being picked off by nimbler traders.
Auctions, which typically occur at the start and close of daily trading sessions, have become a new battleground among trading venues to help institutions trade large blocks of shares.
The auction model helps to alleviate the market impact of big trades as orders can be placed at certain prices for a limited time, with matching bids and offers then executed. That means there is no benefit to being the first to place an order, removing the advantage for high-speed traders.
Bats Europe, the region’s largest exchange, launched an order book that runs auctions throughout the day in October 2015, while the London Stock Exchange launched a third, midday auction in March this year.
Nasdaq is planning to mimic Bats’s model with an order book called “Auction on Demand” that will run auctions continuously alongside its main markets, according to a market notice sent by the exchange on May 20.
Lauri Rosendahl, president of Nasdaq’s Nordic markets, described it as an “optional matching facility for shares, [and] a completely standalone order book”.
The model, which Rosendahl said is still subject to regulatory approval, is set to launch in the fourth quarter of 2016, and will be available for all shares on Nasdaq’s markets in Stockholm, Copenhagen, Helsinki and Iceland.
Each auction will be triggered when demand in a stock reaches a certain level, and will last for less than 100 milliseconds, according to Rosendahl, He added it would also include “multiple anti-gaming protection mechanisms”, including minimum execution sizes and an order cancel speed-bump.
Rebecca Healey, a European market structure analyst at research firm Tabb Group, said: “You can understand why venues are increasingly looking at alternative models. Investors are less keen to use lit markets in the same way as they have before, and you will continue to see a need for greater innovation”.
However, she added that replica models were likely to face liquidity constraints. “True innovation rather than modification of existing models would derive the greatest success – not all participants have the same trading objectives or styles”, she said.
Auctions are also becoming more popular as dark pools fall out of favour. Dark pools were designed to encourage larger block trades by only disclosing details of trades once they are completed. But some venues have faced allegations of improper access, particularly by high-speed trading firms, which have seen order sizes on the platforms fall as such institutions typically trade in small increments.
The revised version of the EU’s Markets in Financial Instruments Directive – known as Mifid II and set to come into force in 2018 – will also impose caps on trades in the dark, though those above a certain size will be exempt from the rule.
Rosendahl said it was “a Mifid II auction model, aimed at creating a more transparent, regulated offering for current over-the-counter and dark trading”.
Figures produced by Bats in May, showed that its non-stop auctions book traded shares worth €36.2 million in the first three months of 2016.
While the figure represented a tiny proportion of the overall EU equity trading market by volume, the platform has achieved higher average order sizes than other venues. The average trade size for FTSE 100 stocks on the Bats platform was €11,300 versus €7,500 on the index’s constituents main listing markets.