Thursday, February 2, 2017 Stamford, CT USA — Stock exchanges’ opening and closing auctions are attracting increasing amounts of trading volume and attention—a phenomenon that will only gain steam with the continued growth of passive investment strategies and ETFs that rely on closing auctions to set their benchmark index prices.
On average across both NYSE and Nasdaq listed securities, closing auctions now represent 5.5% of average daily volume, up from just 3.6% in 2011. Over the same period, average open auction volume increased from 1.1% to 1.25%.
Given the growing importance of exchange-operated auctions, it is critical that market participants understand how different exchanges operate the auction process. For that reason, Greenwich Associates today released a new report, Trading the Auctions, that examines the mechanics of exchange auctions, the differences in how each exchange builds liquidity during the auction window, and the tools available to help traders navigate this process.
“Just as each exchange auction operates in a slightly different manner, the type of information provided by exchange auction feeds also varies from exchange to exchange,” says Richard Johnson, Vice President of Market Structure and Technology at Greenwich Associates. “Traders should ensure that they understand these differences and tailor their trading strategies accordingly.”
Auction Volume Growth
Call auctions are a beneficial feature of market structure, as they concentrate liquidity at a point in time and lead to effective price discovery.
Increasing volumes during auctions is being driven by three main trends: 1) The concentration of liquidity in a call auction provides traders an opportunity to execute larger block-sized orders, while the average trade size in continuous trading continues to decrease; 2) the shift from active to passive investing means that more traders need to execute at the official closing price; and 3) this, in turn, draws in other trading strategies looking to interact with the passive flow.
Trading Insights from Auction Data
Auction data feeds provided by exchanges are a critical tool for traders when executing in the Opening and Closing crosses, but the transparency and predictive insight can vary by exchange. Exchange feeds typically provide market participants with data on the total number of shares eligible to be matched at the current price, the imbalance between eligible buy and sell orders, and indicative price.
More than two-thirds of the 30 buy-side respondents interviewed by Greenwich Associates said that it was either extremely useful or very useful to know the imbalance of a security in an auction. Traders reported that this information helped them determine size of orders and timing, and also helped them get a better idea of the general direction of the market.