In fact, since 2007 when the EU introduced competition to the market, the number of trading venues has proliferated to as many as 20 to 30. However, the increase in trading venues has created an unintended consequence trend of falling trade sizes, from around £20,000 10 years ago to between £5,000 to £7,000 today.
As a result, large investors such as pension funds or insurers have gradually felt uncomfortable placing big orders on public venues and have increasingly turned to dark pools to trade larger blocks of shares.
Dark pools have increased in number and popularity, spurred on by the rapidly evolving financial markets. They are often run by brokers and regulated markets and referred to as “dark,” because the price and size of an order is not displayed pre-trade, allowing a pension fund say to place very large orders without spooking the market.
Some investors say trading in these environments is a way for them to hide their orders from predatory, superfast traders, who can negatively impact prices on “lit” exchanges. However, even within dark pools average trade sizes have come down.
To help give investors a choice in where to trade large blocks of shares, particularly as dark pools’ effectiveness has declined, we are introducing an intraday auction for the larger and more liquid shares traded on our markets. From 2015, all stocks will enter a two-minute auction at 12:00 every day, creating a pause in continuous trading. This will allow an investor’s orders to be pooled together into one larger trade, placed in the auction and not revealed until the end of the two minutes.
Auctions are not new mechanisms. In fact they are how we start and close every trading day. The price you see in the paper for all stocks and the final value of the FTSE 100 shares are all set in the daily closing auction. Auctions have taken place, within a five-minute window, at the beginning (8am) and end (4:30pm) of the trading day on London Stock Exchange since 2000.
At the start of the five minutes, orders are entered into the auction and throughout, additional ones can be added, deleted and modified but no automated execution will occur until the auction’s end. The uncrossing point or final price for a share is generated from the price at which the highest volume of shares can be traded.
While the benefit to the UK’s largest investors is clear, we think private investors also stand to benefit from the new midday auction.
For the private investor, who perhaps does not have access to the same level of research and tools enjoyed by institutional and professional investors, auctions can offer a more level playing field than a continuous market for the pricing of information.
Additionally, in an auction an order contributes to the price of a stock, whereas dark pools trade at prices from other venues, which might not be an appropriate valuation for the trade being made. Because auctions are price forming, they are a fair reflection of the current supply and demand for a share.
What we are aiming to achieve with the intraday auction is greater accessibility and opportunities for all types of investors. Our main market serves as wide a variety of shareholders as possible, from large pension funds to private investors wanting to trade alongside professionals and we will continue to innovate to enhance this as much as we can.