Exploring Market on Close Facilities, Part 2: Europe and the U.K.

PETER HAYNES: Welcome to TD Cowen's podcast series Bid Out, a market-structure perspective from North of 49. My name is Peter Haynes, and today, for episode 72, we continue our series on market-on-closed mechanisms, which we are covering in three parts by region.
A month or so ago, we did the Americas. We are now going to do EU and the UK, and then we're going to finish it up in the APAC in a couple of months here, give everybody an opportunity to digest the information. I know we got a lot of really good feedback from the podcast we did on the Americas market-on-close as we're digging deep into a part of the market that's become quite important.
Joining me today are two equity market-structure experts, both located in London. Evan Canwell joins us from T. Rowe, and my colleague, James Baugh, joins from TD Securities. James and Evan, thanks for joining the podcast.
JAMES BAUGH: Yeah, thanks, Peter. Thanks for having us.
EVAN CANWELL: Thanks for having us.
PETER HAYNES: Excellent. OK. Before we get started, I'd like to give our audience a little background on our guests, and I'm going to ask both of you to just spend a quick minute telling us about your background. So let's start, Evan, with your career pit stops to date and what got you interested in market structure.
EVAN CANWELL: Sure, yeah. So my background originally is in physics, so I've always leaned more towards the quantitative and systematic side of trading. I joined T. Rowe Price in 2015 right out of university onto their quantitative grad scheme.
That was called the investment fellowship. It's targeted at students from STEM backgrounds. I did two years on that program, rotated through various teams, but I particularly loved my time on the trading desk. And I was very lucky that as I was finishing up in 2017, a full-time role opened up on the desk that was focused on electronic trading and market structure.
So since then, the role has continued to grow and now includes high-touch trading and other things, like equity derivatives, ETFs. On the desk, all of our traders use algos, but I'm probably the most in the weeds with it. And then, of course, the market structure side of things as well.
As you might agree, market structure has the potential to be a bit of a dry topic, particularly if it's not communicated well, but I think I've been really lucky to land at T. Rowe because there's a lot of people internally that really care about market structure. They're very good at communicating why it's important for large asset managers like us to pay attention to it.
I also think I joined the desk at a great time because I started in the trader role in mid-2017, which was when everyone was preparing for MiFID II in January of 2018. So I was thrown in right at the deep end and really got to learn what the new market structure would look like. And that learning curve also helped me to get to know a lot of really good market structure, people like the two of you. I feel like, together, we're all just trying to figure out how the markets are evolving.
PETER HAYNES: And it's true. There's no proprietary information in the market-structure world. We're really trying to make the markets better for everyone. And you're absolutely correct to say that in your organization, top-down, there's so much support for understanding this topic. And obviously, your colleague Mehmet Kinak in Baltimore, is a leader in that space, for the buy side, as a voice. And I love the fact that T. Rowe is willing to get their voice out there. I think that helps the entire buy side and the overall ecosystem of trading.
So James, obviously, a market structure is a passion of yours. We've had you on the podcast before. You came on with Dermot Dunphy to give us an update on market-structure developments in your region. That came on, I don't know, a couple of years ago. Just remind our listeners what got you to where we are today.
JAMES BAUGH: Yeah. No, thanks, Peter, I've got a few more years on Evan. So I graduated at the back end of the '90s as a commodity analyst. My path to where we are today is a little bit different maybe to others in that I was involved in all sorts of different projects, including building out our power-index business for Dow Jones.
But I transitioned across to the equity business when I joined London Stock Exchange all the way back in 2005. Yeah, I spent 11 and a half happy years at LSE really understanding the market structure. I was part of the team that acquired Turquoise, the alternative MTF platform post-MiFID I when we saw the markets fragment, when the regulation removed that concentration rule, meaning that Vodafone didn't only have to trade on London Stock Exchange.
And then through that period of time, we got involved in launching conditional order types into MiFID II. I then moved across to Citibank where I spent five years there building up, getting ready, getting the business ready for all those changes that came about during that transition.
And then to finish up, after I finished-- after I left Citibank, I came over to Cowen. As you know, Peter, Cowen was then acquired by Toronto-Dominion back in March, '23. And the market structure, again, very much at the center of how we think about building and developing our business, particularly the electronic stack when we think about all of the changing liquidity dynamics and your arms around this stuff. So yeah, that's me, and apologies for those that have heard all that before.
PETER HAYNES: James, you know what makes me laugh there is you talked about Vodafone. I find it really interesting in the market-structure space. Everyone has that one stock that they go to.
My friend Doug Clark, who works for the Toronto Stock Exchange, every time he would give an example, he would use a really illiquid name called Canada Bread, that was his example. I admit that I have one in Canada. I use Pharmacy Jean Coutu whenever we're talking about the stocks. You use Vodafone. Is that the one you go to every time you mention how markets work, and then you use Vodafone as your example?
JAMES BAUGH: Yeah, I've got BP as a bit of a backstop, but I guess using Vodafone and BP, I really am showing my age a little bit there, right?
PETER HAYNES: Well, I've got to ask Evan, what's your go-to stock every time you're explaining the market?
EVAN CANWELL: Well, I think these days, it has to be something like ASML, so--
JAMES BAUGH: Oh, there you go. Yeah.
EVAN CANWELL: Pretty generational.
PETER HAYNES: There you go, exactly. All right, well look, that's part of this whole awesomeness of market structure. I love prepping for these podcasts, particularly the ones on market-on-close. As I'm doing some targeted research on individual marketplaces, in the process of doing that, I've learned a ton, both on the Americas and now as I prep for the EU-UK piece.
And one of the pieces of research that I was really trying to uncover in my mock due diligence was when each country's primary market first created an end-of-day auction. So as I was studying that, I found out some interesting tidbits about markets. I'm going to throw a factoid at you that I learned here.
When Taiwan first transitioned its market from open outcry to electronic in 1992, it didn't start with a continuous trading model. Instead, it started with periodic batch auctions that ran every 20 seconds. And it only moved to a continuous market in 2020, at literally the same time that marketplaces all over Europe and North America are contemplating launching periodic auctions. So I guess what goes around comes around.
It turns out that Taiwan launched its mock facility in 2002. I'm sure I'll learn more about that one when we get to AIPAC. And I also found out that Israel also, when it went from open outcry to electronic, started out using batch auctions and then eventually ran to continuous. So it is interesting to see some of these "what goes around comes around" developments.
So onto mock. When we think about the market-on-close evolution in North America, there are a few points of reference as to what drove exchanges to create closing auctions. In Canada and the US, particularly on NASDAQ, we saw some ridiculous hockey stick-like closing-price moves during the heyday of the tech bubble. And the poster child, for those that were around, was the S&P 500 inclusion of a NASDAQ internet stock by the name of AOL that was added on New Year's Eve, if you can believe it, in 1998.
Eventually, all the North American exchanges went to closing auctions that run as separate order-entry sessions but in parallel to continuous trading, with the closing cross occurring at the end of continuous trading at 4 o'clock, Mexico being the next exchange in the Americas to move to that type of market model sometime later this year or next year. Now, contrast that in Europe, the convention for closing auctions is to have them take place after continuous trading ends-- very, very different.
So James, I want to start with you. When did the LSE first move to an end-of-day auction to determine the closing price? And then tell us how that model works today.
JAMES BAUGH: So I had to do a little bit of homework as well ahead of the podcast. So yeah, LSE introduced their closing auction back in 2000, so May 30, 2000. And as you quite-rightly say, the closing auction is a separate session that takes place after continuous trading ends at 4:30 PM local time.
The auction runs for a five-minute period. There are some nuances to that we can come to. During that five-minute period, you can be submitting market and limit orders. The final uncrossing, the final closing price is then revealed at 4:35. There is a randomized period of 30 seconds during that close period, and that's when all the trades are then, obviously, matched and executed at a price that maximizes the available volume that-- the volume of trades, if you like.
Now, there are, as I say, some nuances to what I've described there, which I'll, perhaps, save for a bit later, just knowing that there are price-monitoring extensions-- circuit breakers, if you like, to make sure that we get a fair price at the end of that uncross.
We also have, in Europe, which, I think, is another topic of debate and discussion-- we also have what we call a-- sort of a trade at last session after the closing auction, where you can execute at the uncrossing price for a period of time. But again, perhaps I'll just leave it there, and we can get into the weeds a little bit later on.
PETER HAYNES: James, I mentioned the catalyst in North America was some of these crazy closes when we're just literally using 4 o'clock last sale. In fact, NASDAQ used the trade that occurred-- or was printed at 15 seconds after 4 o'clock. That became the closing price prior to having an auction when they first launched in '04. Do you remember what the impetus was for moving to a standalone closing auction in 2000 for the LSE?
JAMES BAUGH: Yeah, look, I think it's a similar-- or certainly was-- that the rationale was not dissimilar in the sense that the idea of concentrating liquidity at the end of the day to create, let's say, more accurate price discovery, try and get tighter spreads, more efficiency in execution. But, again, there are other variables, other elements to this.
For the LSE specifically, there was, I think, a driver, a requirement to align with other exchanges, other European exchanges, that had gone down this route already. And also, creating that-- uncrossing that benchmark for those passive instruments like ETFs that had become, already by then, increasingly important. So I think there's a few things there as to why the LSE decided to launch the close. It seems so, so obvious as to why we have the closing auctions today, but looking back, it seems crazy to think that we, once upon a time, didn't have that ability.
PETER HAYNES: I know Evan and I chatted about that before we did this pod, was just this notion that, what were we doing before we had a closing auction? And I was around then, and it was wild. So, let's talk about the order-accumulation process because this is really different than what we have in North America in the sense that you're having literally an order-entry session for five minutes, and then this closing cross-- or uncross, as you call it, where you match the buys and sells.
How do orders accumulate during that five-minute window? Do you find that everybody fires in right away? Are there people that are coming in at the end of the five-minute window trying to game that random close, throwing in million-share orders to try to mess with the closing price or then cancel those orders to see what happens to the elasticity of the order book? And is the exchange watching for that type of what we might call abuse, or do they have any anti-gaming techniques that monitor for that type of activity?
JAMES BAUGH: Yeah, so-- I mean, again, I'm kind of keeping it relatively high level. I mean, I think what we see, what we find is that we see a big chunk of business getting thrown into the auction within the first 10 seconds, and then we-- the reverse of that being the last 10 seconds, we see a load of activity. So it's definitely bookended when you look at it in those terms.
And trying to get your head around that, that could be a quarter of the total value that's executed in the close is done within 10 seconds at the open, of the open-- of the closing auction-- it's a bit of a tongue-twister-- and the last 10 seconds of the close.
The other interesting metric that we look at is we look at the split between market and limit orders, and that's roughly split 60/40 in favor of limit orders. On an index-rebal day, that's probably skewed even more towards limit orders as you would intuitively expect.
Now, in terms of how the exchanges manage the close, as I touched on earlier, they do have these price tolerances, so these tolerances looking at a percentage shift from the last executed price and continuous to what would be the indicative uncrossing price. And if it breaches those tolerances-- and it could be, let's say, between 3% and 5%-- then we do go into an extension period, which typically lasts, let's say, five minutes. So it's like running the auction again until we get within those tolerances to try and get a fair price, a fair uncross.
The LSE operates two of those price extensions. So the closing auction could last for a period of somewhere between five, 10 minutes if there's some volatility there within those individual names. So I think it's really those circuit breakers, those price collars that are the key policing mechanism, but of course, they're kind of looking out, monitoring what's going on throughout the auction period. And absolutely, there are rules and regulations, and they will call member firms out on it as they need to.
PETER HAYNES: So we have those extensions in Canada, as well. They're generally not popular in the United States, but I'm curious, James, how often do the extensions actually get triggered on a single-stock basis? Is it once a day or once a month? Does it happen very often?
JAMES BAUGH: Yeah, I guess-- I knew you were going to ask me that. It depends on the individual stock, the volatility. It tends to be few and far between on a normal steady day, but again, can be two-- two or three, three or four within a week if there's some activity in a particular stock or there's wider market volatility, so difficult to answer the question, but they happen fairly often.
And finally, before I move over to Evan, is there transparency to the broker community? Like yourself, if you're watching the market, are you alerted when there's an extension?
JAMES BAUGH: Yeah, yeah, absolutely. You have full visibility over those extensions.
PETER HAYNES: Got it. OK. Evan, I want to switch gears here. T. Rowe's, generally speaking-- I don't want to put you in this box entirely, but generally speaking, a fundamental participant in the market. So I'm curious. How would your firm utilize the closing-auction facilities like the one at the LSE?
EVAN CANWELL: Exactly as you say, we are a generally fundamental and active manager. So our trading style tends to be pretty liquidity-seeking. That means that we actually trade through the whole day. We're not primarily benchmarked to the close like some of the passive index funds are. However, with the growth of the closing auction in Europe where it can be 30% to maybe even 40% on rebalance days, that means that it's become the main liquidity event of the day. So clearly, even as an active manager, we can't ignore that.
We actually see really good outcomes from the closing auction when we trade it opportunistically, and we lean in to execute a good chunk of our orders. So if the indicative uncross price looks like it's favorable for us, then we'll look to execute more than we would have done at the baseline level. That whole process has become a little bit more systematic over the past few years. Brokers are offering algos where you can scale your auction participation up and down depending on the indicative uncross price.
If we think about market cap, that's also kind of interesting. The nature of towards the lower end of the market-cap scale, trading tends to be sporadic, and there's a lot more variance in the volume curves versus a super liquid stock, like ASML or Vodafone. So as I said before, we are active in the auctions. That does apply to small caps, but then if there's an opposite-side order in the market that's in our size, then chances are, we might have found them through the continuous session on the day or a high-touch cross, for example.
So, I guess, when you think about it, who's in the closing auction contributing to liquidity, yes, it's long-only managers; yes, it's hedge funds, but it's also broker dealers and market makers looking to get in or out of hedge positions. It's far more likely they're going to be hedging with liquid stocks, like ASML and not really with small caps.
So when we think about the way that we trade, we do see that more opportunistic behavior towards the larger-cap end of the spectrum. It's funny. I'm aware that probably sounds a bit counterintuitive because you might think that less-liquid names would trade more in the closing auction, but if the opposite side isn't there, then you're just going to cause market impact for no reason. And why would you find them in the closing auction if you haven't found them in the eight and a half hours that came before?
PETER HAYNES: Yeah you'd like to think that the advertising that naturally occurs with your orders would find the other side at some point. But on that notion, if you're working a schedule-based trade for a fairly significant amount of volume, would you guys be a demander of liquidity in the closing auction? You refer to your usage as opportunistic. But I'm curious-- maybe not so on the less-liquid names like we just discussed, but maybe on the more-liquid names like Vodafone and ASML, would you ever be comfortable going in there and demanding liquidity as part of maybe a scheduled-based trade?
EVAN CANWELL: Oh yes, we would, and we absolutely do that sometimes when we want the liquidity. There's two schools of thought to trading the auction. It's like, do you go big and early and let the market form around you, or do you wait later in the session, see what the price is, and then get involved? As James alluded to earlier where you a lot of the orders come at the start, or they come at the end.
So when you're more liquidity-demanding, that is a time when we would go early in the auction and want to help drive the price formation because we really want the liquidity.
PETER HAYNES: Yeah. You'd like to think that if you go early in the auction, that the market will be able to absorb your order without as much impact and-- because you're giving the market that five-minute window-- or close to five-minute window to be able to see what you're doing.
As we think about the closing auction on the LSE, Evan, as a user that's mostly fundamental, are there any other tricks of the trade or advice that you have to other fundamental investors, or specific features about the LSE model that people should know before they get involved?
EVAN CANWELL: Yeah, so I think one thing that's quite interesting to-- just to touch on is the specific matching mechanism, a little bit technical, but if we can't geek out about market structure here, then where can we?
PETER HAYNES: Totally right.
EVAN CANWELL: I think on the LSE-- in fairness, this isn't actually specific to the LSE, but it's more just an understanding of how the matching works. Market orders are matched first. So if you put in-- if you're a buyer and you put in a market order, you're pretty much guaranteed to have your order executed.
If you're a buyer and you set a limit that's, say, 5% above the last-traded pricing continuous, that's effectively a market order because the limit is so far away. That means you're going to be matched after the actual market orders, but you're going to be matched before other orders that have tighter limits. So you're balancing queue priority with price protection there.
Finally, if you're a buyer and you send a limit order that's pretty much right at the uncrossed price, then there's a possibility you won't actually get a fill because you're lower down in the order of priority. So that comes up a lot more when you have a very large order with a tight limit. It sounds like a pretty quirky phenomenon of the uncrossing mechanism, but essentially, it can uncross exactly at your level. You get very few or even no fills because you've helped to set the price, but you're back of the queue in terms of matching priority.
PETER HAYNES: Is that being gamed?
EVAN CANWELL: I wouldn't say "gamed," exactly, but there are definitely-- I would say there's a lot more monitoring around the closing auction these days by various strategies in the market. So you have to be aware of how you're interacting with the auction and be aware of how you can try and stop these things from taking advantage of your orders.
PETER HAYNES: Can you put dark orders into your auction in the LSE? Do you know?
EVAN CANWELL: So Interestingly, not specifically on the LSE, but it is something that a number of European exchanges have started to look at.
PETER HAYNES: Yeah, that's actually a great segue because we're going to cross over the English Channel and ask James to give us a rundown. We use the LSE as our proxy here to start with, but I do want to talk about any of the nuances about other mock facilities on the continent, James. So can you walk our listeners through each of the other main-exchange closing-auction facilities, and explain, if we use the LSE as our base model, any differences in model convention compared to the LSE? And maybe you can, in your tour around Europe, if you can tell us who was first.
JAMES BAUGH: There are 15 core markets in Europe. It'll probably be wise of me not to step through each one of those and go through each of the closing mechanisms, but what I would say is-- again, it's a fairly broad brush, but they all operate the same. So there's not really too much in regards to the differences between LSE and those continental European exchanges.
The only two major differences that I can really call out, firstly, maybe to touch on Evan's point, what we do notice is the different outcomes when interacting with those auctions that operate a fully dark model. So LSE is fully transparent, meaning that you can see the full order book, the full depth of available liquidity. It's LSE and the Euronext markets that are transparent, and then it's Xetra and the Scandi markets that are fully dark.
And you made a comment there, Peter, around whether folks are able to take advantage of that. And from the analysis that we've done, we definitely see the outcomes are a little bit different for those fully transparent markets, meaning that there are strategies that are reading the tape, and they're making clear decisions on how they're interacting within the auction, whereas we don't necessarily see the same in those dark models.
So I think that's the first thing, is the market data, the transparency of each of those auctions. And the second thing is, really, the timing. So the majority of auctions in Europe run similar to LSE, to London, meaning a 4:30 start, but then you've got some exceptions, which, again, has been discussed at industry level whether we should actually be a little bit more consistent in these timings just to make it a little bit easier on everybody so we don't have to set our alerts and get ourselves in a bit of a muddle, so the exceptions being the Scandi.
So you've got Denmark, you've got that auction, closing auction, 3:55 to 4:00 PM. You got Finland running 4:25 to 4:30. Norway, 3:20 to 3.25. Sweden, 4:20 to 4:25. And then you got a couple of others here. You got Ireland, 4:28 to 4:30, and Switzerland, 4:20 to 4:30.
So it's not a huge point of difference, but whilst we're talking to regulators and we're looking at European-market structure, I think there has been a bit of a shout-out to say, could align, , these timings just to make it a little bit easier on everybody else? So there are two differences.
And the other question that you asked me, which I did have to Google-- I'm ashamed to admit-- which of the venues, the exchanges, was first to launch closing auction? And Google told me it was the Paris Bourse in 1996. And that was actually for the less-liquid stocks, again, perhaps plays to some of the points that we've already made.
PETER HAYNES: Can't figure out where Spain was in there, too, as I was googling myself whether or not it was before or after. But Paris seems to be the benchmark, and as you say, started with the less liquids.
Let me ask you, Evan, do you have a preference of the Scandi fully dark models versus the Euronext LSE lit models? Which do you prefer to participate in, Evan?
EVAN CANWELL: It's a good question. I see there are pros and cons of both. I think, generally speaking, when our brokers are providing algos that can trade the close dynamically and lean in when the uncross looks favorable, like I mentioned earlier, I think those strategies seem to work a little bit better when the markets are fully transparent.
That being said, if you're a large institutional investor, I can see why you maybe wouldn't want to represent your whole order immediately within the book, but I think as long as you're using a sensible algo or strategy to trade the close, then my personal preference would probably be the transparent markets.
PETER HAYNES: James coming back to out-of-balance order books in the auctions, whether it's in the fully darks or the lit marketplaces, do the other exchanges in Europe have extension processes similar to the one that you referred to on the LSE, or is it case by case?
JAMES BAUGH: The majority have those price-monitoring extensions for any kind of big volatile moves, so that's fairly consistent across the exchanges. And then, again, I referenced the trade-at-last mechanisms that are quite prevalent-- I say "prevalent" in terms of usage, they still haven't really consumed too much in terms of the day's volume, but they're there as a bit of a safety net, and that's to Trade at Last function, which, again, the majority of the primary markets deploy, LSE using Turquoise Trade at Last as their mechanism. Again, there's a couple of outliers there. I think Finland and Sweden don't have a Trade at Last session.
PETER HAYNES: Got it. OK, so Evan, along similar lines to the question I asked earlier about the LSE, when I think about our Bid Out podcasts that are trading-focused, I refer to them as catering to what I'll call tourists. And what I mean by that is we're really helping the traders that are in a market once in a while and might not be knowledgeable in all the local conventions in markets, both written and unwritten. And I can tell you I've already learned a few from you folks so far in this podcast.
So one story I remember hearing in the early days of Paris was that when a stock went into an extension on the old Paris Exchange, that the exchange itself would call the local brokers first. That's why I of asked earlier, James, if you guys had transparency about London extensions because global brokers would say the local brokers in France got the call, and they would know when there's something out of balance or there was an opportunity.
I don't know if this is urban myth or if it was true, but it was certainly a story we heard in the late '90s. I'm curious, Evan. Are there other important local-market nuances across the European auctions that the tourists should know about?
EVAN CANWELL: Thankfully, I don't think anything like that goes on anymore with the local brokers, so we appreciate the move to electronic markets. But I think if we think about listeners who might be coming from the US where they're broadly familiar with the closing auction but maybe not the specifics, I guess, first minor point, I would definitely echo what James said with not all auctions across Europe run at the same time, with all the main ones that he mentioned. Like particularly, the Scandis, they catch a lot of people out.
But also, just be aware there's a few others with really quirky close times. Like Hungary, closes at 4:07 for some reason, the auction's biggest liquidity event of the day. You want to make sure you don't miss it.
The other thing that we briefly touched on is the Trade at Last session, or TAL, as we call it, where you can trade only at the closing price, assuming that there's someone on the other side. I think not all venues have this across Europe, but it seems like most of them do. I think outside of our region, it's only the ASX in Australia that has it.
It is a very small part of the day's volume. It's mostly transparent, but a few years ago, we did see a few dark TAL sessions launched, so you could opportunistically put in bigger orders without the worry of information leakage.
And then I guess in a similar vein of innovation and dark orders around the close, both SIX Group and Euronext have launched a new order type called Auction Volume Discovery, or AVD. That's, essentially, an iceberg order in the closing auction that allows you to display a small piece of your order on the book to contribute to the price-formation process, but then you can still execute the nondisplayed portion of the order behind at the closing price provided that there's an opposite-side AVD order. So I think those are two interesting call outs.
PETER HAYNES: You're right. TALs don't exist in North America. We'll talk about alternative closing auctions in a second. But the dark TAL and the TAL concept would be something foreign to North American marketplaces, at least as far as I know.
So, James, when we talk about-- Evan talked about most important price point in the day in the auction, and I think that's pretty much a given around the world. And we always hear these numbers-- you threw a couple out earlier-- about daily volume that's taking place in the auction, especially around a rebalance day.
So 25% tends to be the number we hear in Europe. Can you tell me-- is that a decent estimate for the amount of percentage of volume that's taking place in the Euro and UK auctions? And can you tell us, if that number is 25%, is it trending higher during the closing auction, or have we peaked and it's now trending lower? I'm curious where we're at in that evolution.
JAMES BAUGH: Yeah, no, I think-- yeah, I think it was Evan that called out a couple of numbers there earlier. And yeah, looking at the charts, it is around 25%, 30%, and that number is, as a percentage of lit, tends to be how people think about it over here. When we look at it in the round and we look at it as a total percent of volume, which includes a lot of the book data, it's a little bit less than that.
Interestingly, though, the actual value-traded numbers over, let's say, the last five, six, seven years haven't really trended higher. So this is just a higher percentage of probably flat volumes. When you break it out by market, there are differences, nuances between the different markets. I would say that it's really UK, Germany, and France that's skewing that number higher. Will it continue to grow? Good question.
I would say one of the other interesting points of discussion, topics, that we've looked at and analyzed is now the growing amount of internalization of close business, business that gets printed as principal, as SI business, so not easy to measure as that GMOC flow, that Guaranteed Market-on-Close, business, a slight exception there with the UK where you do have to flag it as such.
But what I would say is that internalization could be a third to half the day's close business that's not executed on a primary auction on the traditional exchange. Again, that could start to erode that percentage, that number. So we might see that number come down from 30%, 25% to 20%, 15%, but we haven't seen that trend yet.
Although interestingly, May was a bit of a blip down compared to the prior and more recent months. In fact, in May-- I'm just looking at a chart I've got in front of me here-- that dip down from a high of 30-plus percent to near a 25%
PETER HAYNES: So James, I want to pause on the alternative exchanges. I'm going to ask Evan about that in just a second. Just before we get there, though, something we're seeing in the Canadian auction is what we're calling inaccessible volume, and that is transactions where both sides of a paired order show up in the auction.
So let's say, for instance, you have 2 million Vodafone trade in the auction, but 1.5 million of that was a buy order, and 1.5 million of that was a sell order. The two parties knew they were going to be in the auction and that they were going to match market-on-close. So arguably, that was inaccessible. The real volume would be-- that was accessible would only be 500,000 of my example I was giving there. Do you see any evidence that a portion of your on-close volume is what I call inaccessible, or even a significant portion of that like we're seeing in Canada?
EVAN CANWELL: Yeah, we don't have that similar mechanism over here, so we have to treat everything is being considered as accessible. I suppose the only caveat to that could be where a bank, a broker already has both sides and puts it into an auction mechanism, whether that's a traditional-exchange auction or an alternative auction. But at that point, there's no preferencing in order to, let's say, self-manage that business. So it's a little bit different over here, Peter.
PETER HAYNES: OK, so Evan, on that same talk about alternative closing-cross facilities, the incumbent exchanges are arguing that these alternative closing-cross facilities that will allow brokers to internalize MOC flow, as James just talked about, that they're actually harmful for liquidity. And thus, they harm price discovery during the closing auction.
In the US, these facilities are generally broker-sponsored, and the trades that are matched within the broker-sponsored facility get printed after the closing auction takes place. Whatever residual demand or supply a broker might have, they'll fire into the auction, so it'll participate in the auction. And in Europe, I believe there have been some marketplaces, like Aquis, that have started to offer this so-called closing-cross facility.
Have these facilities become material enough for you to be paying attention to? And do you believe, like the exchanges, that they're actually harming price discovery and liquidity at the close?
EVAN CANWELL: So as you say, we've seen quite a few alternative closing mechanisms springing up. Firstly, we've got the alternatives operated by exchange groups like Aquis and Cboe. Also gets grouped into that is the trade-at-last stuff, which we talked about earlier. That's primarily operated by the primaries, not exactly an alternative to close. It's more of an extension, but we'll group it in any way. And then finally, as James mentioned previously, we've also got the broker or market-maker internalization mechanisms that give you the guaranteed market-on-close execution.
So I had a quick look at Rosenblatt stats for April, and looking at these alternative mechanisms, there was an average of around 1.1 billion euros which traded in these mechanisms, which is roughly 7% to 8% of the total volume traded at the close. Of that 1.1 billion alternative closed liquidity, over 82% was done at Aquis MaC, around 12.5% was on Cboe 3C, and then all of the primary-exchange TAL sessions combined are a little over 5%, so heavily skewed towards Aquis.
And Aquis MaC is an interesting innovation because their matching mechanism runs from-- and we use UK times here to keep it simple. So their matching mechanism runs from 4:30 to 4:32 and 30 seconds, so two and a half minutes instead of the full five-minute auction for the primary close. At the end of the two-and-a-half minute window, it tells you how much of your quantity is matched, but it doesn't give you a price at that point.
There's two things to note there. One, you know you're matched quantity halfway through the primary auction, so you can then decide whether you want to route that onto the primary. And then two, once the primary auction uncrosses, that's when the previously matched quantity on Aquis will receive the official closing price.
James, James also mentioned the broker-internalization mechanisms, and again, they're much harder to measure because they're not happening on exchange. And then you also have things like swap-to-swap transactions, which don't actually have to be reported. So, ultimately, only the brokers really know what's going on, but they are another avenue for receiving the closing price.
As for-- I mean, whether all of this impacts the liquidity at the close and price formation, it is a really tricky question. One thing you will notice is that for most of these alternative closes-- I think Cboe is the only exception, but you're mostly trading at the official closing price, which is still being determined on the primary exchange. The argument that we hear a lot is that these alternatives, they're only taking the match quantity away.
So by its nature, it's not price forming. So when the imbalances are all routed to the primary, they still do contribute to the uncrossing price. I mean, I do see both sides of the debate. Mathematically, auctions just work best when everything is in one place, but then that doesn't really gel with our industry's drive for competition, innovation.
So I think, in a nutshell, I wouldn't really say that liquidity has gotten worse around the auction. And you can see it still is broadly growing, but the close has definitely become more fragmented. So it's really on us as a trading desk to learn how to navigate that.
And as a final point, I just think that's a great example of why market structure is so important to us, because by understanding it and seeing how things are evolving, we're then able to continue executing, consistently at the close, which, ultimately, drives better outcomes for our clients.
PETER HAYNES: Wow, we could have a full podcast. In fact, we will. We'll bring you guys back in a year, and we'll debate everything you just talked about there because it's literally a side podcast and a great, great debate to have about price formation.
One quick thing I want to clarify here on Aquis. You mentioned that you get back your fill after two and a half minutes. The broker that put the order into Aquis then is responsible for routing onto the primary exchange the residual order. Is that correct? And that creates an operational risk to a broker, and we are one of those brokers.
Handling a lot of flow at that point in the day, you can make a mistake. That's one of the things I worry about. And just to be clear, we would route on the residual order or would Aquis route on the residual order? Or is there a choice?
EVAN CANWELL: I believe it's the broker that does the onward routing. And that-- actually, to James's point, earlier when he was kind of talking about orders come early in the auction or they come late in the auction, the LSE actually put out a really interesting quant piece on this a little while ago which, essentially, said that they're seeing orders coming in even later in the auction.
And one of their hypothesis behind this was it's because of the rise of Aquis. And now people that know the matched quantity they have on Aquis, they're then onward-routing that the imbalance to the LSE, and that's why you see the price formation process happening later than it had previously.
PETER HAYNES: That makes sense for sure. So Evan, this is something I've really been starting to think a lot about, is, when you come right down to, what is the impact of having an auction at the close that runs in parallel to the regular trading session versus one that pops up after the regular trading session ends? And so it really does have a difference, with respect to price formation and trading in the continuous market, in the last 10 to 15 minutes of trading.
So in North America, what we're finding-- and everyone will say this-- is that a significant amount of order flow is entering the continuous limit-order book of the primary-listings exchanges in those last few minutes in response to the continuously updating MoC imbalances and order-book information which is being provided to the Street in the last 10 minutes of trading.
Meanwhile, in Europe, my understanding is that trading seems to be slowing down ahead of the close given that there is no auction transparency ahead of the end of the regular trading session. How does the lack of pre-close auction transparency impact your trading activity in the continuous market just before the close? And does your trading activity, at this point of the day, differ in any way between the different countries in your region?
EVAN CANWELL: For us, we are pretty consistent in the sense that we're liquidity-seeking. That approach generally applies across all countries. We will adjust our trading behavior based on market-specific dynamics. So regions like Italy, which has more trading on the primary lit and slightly less in darks will approach that a bit differently to the UK, for example, which has more dark activity.
I guess for the period, in the 15 minutes or so right before the close, I've heard anecdotally that some firms will completely pull out of the market because they don't want to have some impact on the price towards the end of the continuous session, which then, potentially, could have an influence on the auction and the uncrossing price.
We don't do that; however, although we don't pull out of the market completely, I do feel that our willingness to trade a block in the run-up to the auction probably drops off pretty quickly because the close is so close, and it's such a huge liquidity event that you might as well wait for that if it gets to that point in the day.
PETER HAYNES: So James, when we think about the different participants in the ecosystem of the closing auction in Europe, maybe you could break down for us the different players that are involved. And specifically, I'm curious about what role short-term HFTs and market makers play during this period of time.
In North America, we see the short-term traders taking the imbalance information, trading in the continuous, and recycling risk through that 10-minute window. And by the end of the 10-minute window, in the closing cross that occurs right at the close, they can be out of their risk, just paired it in the auction, traded the other side of that in continuous, and eliminate any risk, whereas without that information occurring prior to the auction, a short-term trader might be left with a residual position at the end of the auction, and they can't recycle that. Is that a factor in their participation in the auctions in Europe?
JAMES BAUGH: Yeah, it's difficult to tell in terms of who's participating in the auction, but I think we've picked up on a couple of themes, haven't we, as we've been talking through this. And again, it's somewhat up for debate, but I think what we definitely are seeing on our side is the changing-liquidity dynamics based on that fragmentation of the close business, meaning that there is clearly a chunk of business that's been taken out of the traditional primary auction.
And where-- I think Evan mentioned a percentage number there-- I think 7% comes to mind-- of business that's done away from the primary auction. That number is significantly higher, particularly when you think about that broker, that bank-internalization piece that we can't measure. It's very difficult to measure. And as I said earlier, that could be a third to half the day's close business is being consumed by one or two, two or three of the big global banks.
And really, what that's having an impact on is the outcomes. When we're interacting on behalf of clients, when we're trading in the auction, we have to be mindful that there is somewhat of a dilution effect, as in there's less client natural liquidity to interact with, in relative terms, given that fragmentation that we've talked about.
So those proprietary trading strategies are looking for those outliers, looking for those opportunities to trade against that contra liquidity. So you-- and again, Evan alluded to this before. You've got to be mindful in terms of how loud and proud you want to be early on in the auction, how tight your limit needs to be, taking into consideration what that means in terms of how much business you're going to get done at the uncross.
And we've put some measures around this. We've looked at that price list dislocation, meaning the difference in price between the last execution in continuous versus the uncrossing price. And that price dislocation has widened and is wider in those more transparent markets, which plays to that narrative that some of those proprietary strategies are consuming that data and taking those opportunities. And we also see that on a T+1 basis where we see some reversion back to the last price and continuous from the previous day, so moving away from the uncross, which, again, for us, paints a picture in regards to how the liquidity dynamics are shifting.
And to your earlier point, Peter, I think there is a willingness now for these firms to carry overnight risk. Obviously, there's a cost benefit to all of this, but if they see there's an opportunity to interact with a large institutional block order that might have a wide limit, then they're happy to do so. And that's, again, a lot of thought, and time, and effort that we have to put into how we manage client orders into that closing-auction phase.
PETER HAYNES: And just as we finish up-- we've covered a ton of ground here-- finish up the auction portion of this discussion, just one final question, and either of you can answer it. At the end of the auction at 4:35 in London-- we'll focus on that one-- is there after-hours trading that takes place in Europe now, whether it's on the Cboe market or on-- is there anything happening after your auction as we move towards this ridiculous notion of 24-hour trading? I'm just curious. Is 4:35 it? Or are there any venues that are allowing you to trade after hours.
EVAN CANWELL: Yeah, so we've got the TAL sessions, which are-- like I mentioned, before, it's on most of the European primary exchanges. So I feel like we've covered those. So those are probably the main examples of what we would maybe think of as after-hours trading, which is crazy compared to the US after-hours trading because TAL, for us, is five, 10 minutes max. The only other venue that allows you to trade after the close is Cboe 3C, which is kind of quite a--
PETER HAYNES: Until when?
EVAN CANWELL: I believe it's till 4:55. It's either 4:50 or 4:55.
PETER HAYNES: Oh, so it's really short.
EVAN CANWELL: It is a very short. And it's quite a unique mechanism. You put your limit orders in, and you don't necessarily have to trade at the closing price. You put your limit orders in and hope that volume comes to you. But yeah, those are-- as far as I'm aware, those are the only mechanisms we have for official after-hours trading.
PETER HAYNES: I bet a couple of years-- well, a couple years from now, we're going to be talking 24-hour trading and I'm going to ask that. So I'm going to switch gears here. I've got two market-structure experts from Europe. I can't let you guys go without really quick-hitting on some of the hot buttons outside of auctions that you're both dealing with currently in your region.
Evan, I'm going to start with you, and again, we'll go quick-hitters here. Can you give us the latest on the debate over a consolidated tape for the UK and the EU and also, the industry complaints we're seeing around cost-of-market data?
EVAN CANWELL: All right. So European consolidated tape, big topic. It's been talked about for many, many years, but it looks like it's really happening this time, so fingers crossed. It's finally going to give us a good understanding of true volumes in Europe, which, on a day-to-day basis, will make life easier for traders, PMs, and so on because we'll all be using the same data. And then I guess from a more strategic perspective, it's also aiming to make European markets look more attractive to global investors because we'll be able to demonstrate that our region actually has far deeper pools of liquidity than previously thought.
In terms of the consolidated tape, right now, it has been slightly complicated by Brexit in the sense that there will be two separate tapes, one for the EU and one for the UK. Both the UK and EU are taking the approach of launching a bond tape first and equities second. The EU are running slightly ahead of the UK in terms of timelines. I think the EU's bond tape is expected, actually, towards the end of this year, so 2025, with the equity tape expected in mid to late 2026, while the UK's bond tape is likely to be 2026, and the equity tape is probably going to be 2027.
The EU equity tape is going to be pre- and post-trade. Pre-trade will only show the European best bid and offer across exchanges and periodic auctions. There's going to be no venue attribution, so consumers of the data won't be able to route their orders based on that information alone. And then the post-trade tape, on the other hand, is actually going to be really comprehensive. It's going to include all prints from venues, APAs, systematic internalizers.
In terms of the providers, all but one of them have now dropped out. So early in the process there was a joint bid from Bloomberg, MarketAxess, Tradeweb that fell through. Cboe and Aquis launched a joint bid called Simplicity. So they definitely get a prize for the best name, but they've also pulled out. And then finally, we had big xyt. They recently made a surprise announcement. They were going to be making a bid, but they've, unfortunately, now pulled out, as well.
So all of that leaves EuroCTP as the only publicly declared bidder for the EU consolidated tape. That is an organization which is backed by multiple European primary exchanges. So unless there's a new entrant at the 11th hour or any organizations that haven't publicly declared their bid, then it's likely that EuroCTP are going to be the provider.
That has obviously raised questions from the industry about, how do you ensure that it's a competitive process if there's only one bidder? What are the costs going to look like? So we'll have to wait and see how it all shakes out.
On the topic of costs, you asked about market data. Very, very topical. This year alone, we've had multiple industry surveys that put market-data costs right towards the top of the list of concerns, as well as a couple of high-profile research pieces. One was a paper by Market Structure Partners. The other was a joint paper from Expand Research and Substantive Research.
Stats from that second paper found that average vendor-renewal costs went up by 15% in 2024, but the buy-side market-data budgets only increased by 2%. So clearly, there's a bit of a gap there. Several exchanges responded to the papers, pointing out that the data was inaccurate, and they're still required to provide it on a reasonable commercial basis as set out in the regulation. I'm assuming that this is going to stay top of the agenda, and we'll probably see more back and forth.
PETER HAYNES: Yeah, we'll keep on top of that one. Just a quick follow-on. Are we still on Skid for T+1 in Europe and the UK for October of 2027? Is that the coalescing date, or has anything changed there?
EVAN CANWELL: Short answer is yes, we are on track for T1 across Europe. Consensus is still for 11th of October, 2027, so mark the date in your calendar now. We had the UK kicking things off with the Accelerated Settlement Task Force. They've been hard at work making sure all the plumbing in the background is ready for the move.
And then the EU has also agreed to target T1 at the same time. And separately, the Swiss Post-Trade Council have also recommended moving in October 2027. So if all goes well, it seems we'll get a coordinated move across Europe, which would be nice. And hopefully, it goes as smoothly as it seemed to go in the US.
PETER HAYNES: Yeah, for sure. We're all hoping for that. It'll simplify global trading. James, over to you. European regulators recently published an all-encompassing paper on market structure that included a question about whether the region needs an order protection rule. I'm laughing.
Admittedly, we North American market-structure nerds did find it a bit funny that Europe is looking at OPR when there is chatter over here about potentially getting rid of OPR. Are there any legs to this discussion? And what are the other important topics, if any, that were raised by regulators in the paper that we should be keeping an eye on?
JAMES BAUGH: So firstly, on the order-protection rule, has it got legs? Well, it seems that there's been general pushback across the market, including buy-side, sell-side exchanges. The market structure here is clearly very different. We have solved to liquidity access through-- mostly through sell-side broker-led smart-order routers, but this really comes back to the keen focus of the commission on encouraging more retail participation.
The question, the concern they have is that the retail don't have access to all available liquidity. I would argue that if they used brokers like ourselves to access that liquidity, it really wouldn't be a problem, and it would be a relatively low-cost solution. We'll have to see.
As I say, if the regulators-- if the commission are listening and are reading the responses, then I can't imagine this will go anywhere. If they're not listening, then watch this space. I mean, I am aware that there are one or two dissenters out there based in regions that might not even be MiFID-compliant themselves. So it would be an unfortunate turn of events if they listen to the loud minority in that respect.
Other things to look out for. That consultation, I think, has been very much interpreted over here as, dare I say it, MiFID III. That's nothing official, but I think Evan would probably agree with me. It's a fairly far-reaching and broad, encompassing look at market structure in Europe.
I think we're concerned, given the time, money, and effort spent on getting to where we are today with MiFID I and MiFID II, that we don't really want to see this current market structure ripped up without really understanding where the issues lie and whether or not mandating and enforcing the rules we have in place today could be a better way of going about it.
But they are looking at best execution. They're looking at the consolidated tape, actually looking at consolidated tape and asking questions of the validity of the tape that Evan has just described, which is crazy. We haven't even launched it, and they're already questioning it.
And what else have we got in there? They're looking at bilateral liquidity. To your earlier comments, they're looking at 24-hour trading, whether Europe is-- or should be following the US to remain competitive. Again, that's a whole different podcast, but I hope that we can find a sensible outcome to that debate in really understanding that the retail demand here is not what it is in the US, and by simply adding a few hours to the trading day, it's not going to create demand that's not there. Hopefully that gives you a flavor of what might be coming down the tracks.
PETER HAYNES: And Evan, just as I finish up here with you on 24-hour trading, do you see-- I know we asked that earlier about extending 20 minutes. There's a little bit of Cboe activity that happens after the close. I'm curious. As you make the rounds, if you talk about 24-hour trading in North America, everyone's talking about it and no one wants it except the retail community. Is there anyone even talking about it other than a brief mention, as James talked about in the recent document that he just discussed?
EVAN CANWELL: I suspect that many of us feel in the industry that, since venues across the US are looking at it, it's likely that European venues are also looking at it, and we might follow the US like we did with consolidated tape and T+1.
As you're probably aware, to reference a few years ago to actually try and shorten the European trading day with the main arguments being that we've got the longest trading day in the world at eight and a half hours, assuming you ignore the 24-hour markets in the US. We also don't have the liquidity that requires that, as the US is only six and a half hours but trades anywhere from 10 to 20 times more than Europe does.
And then with the continued growth of the closing auction, you end up with this really quiet midday portion of the continuous session where liquidity dries up because no one wants to do anything before the US opens. And that's even before you get into the arguments about employee well-being and competing for talent with other industries when our trading day is so long and so rigid.
So, the main argument against the shorter European day is typically from the exchanges. And it means we'd see less trading. But I mean, really, I think that we'd get the same amount of trading, just condensed into a shorter day. And that is actually backed up, as well, by various studies that looked at what happened to volumes when Norway changed their hours, for example.
I think if 24-hour trading is inevitable, then maybe the best-case scenario is that we adopt a US-style day where there's an official open and close, but investors are free to trade before and after those times if they want. We'll always need that official close price for NAV calculations and so on.
But in a world of 24-hour trading, the timing of the official close is kind of arbitrary. There's no reason why we should be tied to opening at 8:00 and closing at 4:35, so why don't we just set the official open and close to something like 9:00 AM to 3:00 PM? Because what difference would it make if the markets are open 24 hours anyway?
PETER HAYNES: Totally agree. Great discussion. Boy, we covered a lot of ground here, guys. I can't thank you enough. I learned a ton here through this discussion, both on the market-on-close discussion-- topics, I should say, as well as the quick-hitters at the end. I'll look forward to chatting about this again when I get you guys back on down the road to see how some of these issues have evolved.
Thank you, Evan, and thank you, James, for coming back-- Evan, for your first visit here. And I hope both of you are able to come back again. Thanks again on behalf of TD.
JAMES BAUGH: Thank you.
EVAN CANWELL: Thank you very much.
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