Exploring Equities Closing Auctions and Dark Pools Best Practices

The Finance Hive: Digital Café, 25th April
Challenges, benefits, algorithm providers, and everything else you need to know…

On April 25th, Finance Hive members gathered for an engaging Digital Café, delving deep into the best practices surrounding Equities closing auctions and dark pools. The session covered a wide range of topics, from benefits and challenges to innovative solutions and algorithm providers. Here, we provide a comprehensive summary of the key points discussed during the meeting.

Benefits of Closing Auctions and Dark Pools

Closing auctions play a significant role in price formation, with much of the day’s trading volume passing through these venues. However, traders need to set a minimum price and volume constraint for more efficient pricing.

Dark pools offer traders the advantage of anonymity and reduced market impact, essential for executing large orders.

High-touch traders might face challenges when trading at the close (TOW) due to the need to monitor and measure large amounts of information. However, remote working arrangements may lead to better client outcomes as traders have more time to focus on execution.

Algorithm Providers and High-Touch Trading

Algorithm providers often take a considered approach when operating in closing auctions, incorporating regular strategies with a staggered approach to achieve optimal outcomes.

High-touch traders can struggle with market makers in closing auctions, as the latter may not be as effective in these venues due to the volume of information they need to monitor and measure.

Challenges and Solutions

1. Guaranteed Close Orders
Some participants expressed concerns about the potential for opportunistic brokers taking advantage of guaranteed close orders, which may not be beneficial for all traders.

2. Internalisation and Price Stability
Internalisation offers benefits by allowing traders to pair off imbalances before entering the closing auction, which can contribute to price stability.

The GMOK (Guaranteed Minimum Order Quantity) phase is rarely used due to limited profit potential.

3. Swiss Auction Volume Discovery
Some participants mentioned the Swiss Auction Volume Discovery as an interesting development, with hidden orders encouraging liquidity.

Data Quality and Algorithm Providers

Participants noted that broker-side data quality is generally good, with some firms offering augmented algorithm data packages for more in-depth analysis. The success of algorithm providers in closing auctions varies, with no clear standout. However, larger banks may have an edge due to their internalisation capabilities.

Trading Costs and Strategies

Cost concerns remain prevalent, with approximately 50% of calls related to trading costs. Some traders aim to beat the close by automating their processes, while others opt to trade continuously throughout the day and only use the close for larger orders. Algorithm providers with a dynamic approach to trading at the close, using opportunistic strategies, can help traders manage costs and achieve better execution.