We have taken a look at what is affected, who is affected and why this has been introduced.
What is it?
Currently there is an auction before live trading opens and one immediately after. These are used to establish the opening and closing prices of a stock.
The intraday auction will be the third scheduled auction period in a typical trading day. It will begin at midday and last for two and a half minutes, although it could extend for a period of up to 16 minutes. During the auction there will be prices displayed but only Level 1 and no automatic executions will take place in impacted stocks.
As people may or may not know, there is scope for unscheduled auctions too which will include stocks involved in excessive price movements.
TD customers can continue to place orders during the auction period and those trades will be executed once the auction completes. Alternatively they could wait for the auction to cease when prices will be available again.
Note that a SETS auction will not halt electronic trading in all stocks. Non-SETS stocks will continue to trade throughout the auction periods.
What is SETS?
SETS is the LSE’s main electronic trading book, it contains FTSE 100, FTSE 250, FTSE Small Cap index constituents, Exchange Traded Products (ETPs) as well as liquid AIM Listed securities.
Scheduled SETS auctions;
- Opening Auctions – Every day from 7:50 to 8:00 (Establishes the opening price of a stock).
- Intraday midday Auction – Every day from 12:00 to 12:02 (Can run until 12:16 if the stock moves a certain percentage during the initial auction)
- Closing Auctions – Every day from 16:30 to 16:35 (Establishes the closing price of a stock).
How does it work?
The auction will allow market participants to enter orders without immediate execution and to concentrate available liquidity.
Typically, during an auction, the buying and selling prices will cross in a process known as backwardation. This will mean that the Bid price (selling price) is displayed as higher than the Offer price (buying price). This can sometimes result in people seeing their portfolios reflecting unexpected valuations. However, once the auction finishes portfolios will reflect the prevailing market rates.
At this time orders are matched and an uncrossing algorithm is run to establish the price of the stock, this can take up to 30 seconds to run, then normal continuous trading resumes.
Why is this happening?
Back in November 2014, the LSE released a statement declaring a new intraday auction. Over 16 months later this has come into effect.
Speaking back in November 2014, Brian Schwieger, Head of Equities for the LSE, said:
“This is a very significant change to the trading day. The introduction of the intraday auction is in direct response to demand from buy-side participants for neutral, infrastructure-led solutions for trading in large blocks. The auction will allow participants to place orders in a truly confidential, yet price-forming environment via a well understood mechanism.
“The 12.00 timing is based on market feedback, matching the current intraday auction in Germany. We are aware that institutional investors hope it will encourage European markets to follow suit, creating over time a significant and harmonised pan-European focus for liquidity at midday across the continent.”
Remember, this takes effect daily from midday 21st March 2016.
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