The Impact of Introducing Intraday Auctions on LSE

Projekt Start:01/2016
Forscher:Peter Gomber, Satchit Sagade, Stefan Scharnowski, Erik Theissen, Christian Westheide
Kategorie: Financial Intermediation, Financial Markets
Finanziert von:LOEWE

The growing popularity of venues which are not pre-trade transparent has been a cause for concern for exchanges (due to loss of market share), as well as for regulators and policy-makers (due to potentially adverse impact on the price discovery process). Gomber et al. (2014b) argue that, while determining the strategy to execute an order, traders jointly determine the specific venue where they wish to trade as well as the size of their orders. They also find that lit (dark) venues predominantly attract order flow in small (large) sizes. Trading on lit venues is mostly conducted in continuous limit order markets which typically open and close with a call auction. Existing literature on the tradeoff between different venues has mainly focused on the trading in multiple continuous markets, or in continuous markets on the one hand, and dark markets such as the OTC market or dark pools on the other. However, trade-offs involving call auctions have rarely been examined in the literature. Gomber et al. (2013) examine the effects of call auction trading during volatility interruptions in the main market, and parallel continuous trading on an alternative venue. The existing literature on call auctions has typically focused on optimal design of auctions (Garbade and Silber, 1979) and comparing the allocative efficiency of call auctions with continuous markets (Economides and Schwartz, 1995). Recently, Budish et al. (2013, 2014) propose the introduction of call auctions at high-frequencies to eliminate the technological arms race associated with HFT. In late-2015, the LSE will introduce an intraday call auction ‘…as an alternative to “dark pools” for the matching of larger sized orders.’ We will examine this event as a quasi-natural experiment to understand how market share changes, specifically from dark pools but also from other lit and dark venues, after introduction of this auction. Assuming that the auction is successful in attracting volume, we also propose to examine the impact of introducing the auction on liquidity and market quality.