Europe’s biggest stock exchange, which built its market share in an era of speedy, sliced-up equity trading, is targeting blocks for the first time.
Bats Chi-X Europe will introduce an order book next month that prioritizes size over speed, according to a statement on Monday. The new order book will try to help traders buy and sell blocks via frequent auctions, such as those that commonly take place at the beginning and the end of trading on traditional exchanges.
Norway’s sovereign-wealth fund, the world’s largest, is among those who have complained that the proliferation of trading venues has resulted in shrunken stock trades, making it harder to place their big orders.
“It’s a clever idea,” said Adam Conn, head of dealing at Baring Asset Management in London. “With all of these things, the proof will be in the eating.”
Others are also diving into block trading. London Stock Exchange Group Plc’s Turquoise venue has built tools to enable the practice. A consortium of banks and asset managers plans to open a new venue for block trading. Firms including Investment Technology Group Inc. and Liquidnet Holdings Inc. also offer it.
“For people who trade in large size, like us, liquidity has become the biggest challenge that we have,” said Gianluca Minieri, Dublin-based global head of trading at Pioneer Investment Management, which oversees $244 billion.
A customer suggested looking into auctions, according to Chief Operating Officer David Howson. Under Howson’s direction, the European arm of Bats Global Markets Inc. started developing the project about seven months ago and plans to offer periodic auctions from Oct. 19.
The new order book, the firm’s first since 2009, will hold auctions for more than 4,000 European stocks throughout the trading day. Intervals between the auctions will range between about 100 milliseconds and 5 minutes, depending on the liquidity of the stock.
Even the most frequent auctions will be much slower than the trading on other Bats’ books -- about 1,000 times slower. Because Bats is introducing a separate book, the auctions will not interrupt continuous trading in its other markets.
That differs from the approach taken by the LSE. Last year, the stock exchange said it would halt continuous trading in London to hold a third auction. It’s designed to attract block trades, and some say it’s meant to lure trading away from competitors such as Bats.
“The only doubt I have is that perhaps the proliferation of new initiatives and new platforms might have gone too afar,” Minieri said. “New venues are useless if there’s not liquidity.”
Block trades are tricky because investors worry they could be susceptible to gaming or that the market could move while the order is awaiting a match.
Bats tries to calm those concerns by randomizing the end of the auctions. That makes it harder for traders to predict and potentially exploit orders. Bats will also cancel auction trades if the stock rises or falls past a threshold before the auction can be concluded. The exchange operator is adding to its surveillance measures to try to prevent predatory trading.
Regulators have tried to make stock prices more widely available to investors. They’ve done in part by imposing limits on dark pools, as off-exchange venues that don’t publish prices are called. Crucially, the limits have a waiver for block trades deemed large-in-scale.
“The elephant in the room is the dark volume caps,” Baring’s Conn said. “That is one of the catalysts for the latest round of initiatives.”
Bats’ new order book isn’t a dark pool, so it won’t be subject to the restrictions, which come into force at the beginning of 2017. If the new book attracts trades away from dark venues, it could also help prevent stocks from breaching regulatory limits.
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