London Stock Exchange Introduces New Midday Auction to Increase Transparent Trading

The UK's main financial trading venue, the London Stock Exchange (LSE), has introduced revolutionary measures that support high-end institutional investors. A daily new auction at 12pm is expected to boost flows from pension funds looking to execute orders with minimal market impact. The LSE announced its decision to conduct the auction at midday after receiving feedback from participants. The move signifies the importance of transparent solutions for trading firms.

After months of discussion, the LSE has reported that it will be implementing new measures to its auction practises. The leading London-based trading venue for stocks and derivatives will roll-out a new auction period. The firm stated that equities trading will halt at 12pm for two minutes. The introduction follows-on from a comprehensive, industry-wide consultation and has received strong support from the buy-side trading community.

Brian Schwieger, Head of Equities at the London Stock Exchange, commented in a statement, he said: “This is a very significant change to the trading day, following a detailed consultation with market participants. 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 LSE operates a pre and post-trading day auction, this period enabling trading firms to carry out transactions without impacting markets and deflecting themselves from possible predatory traders. The new auction mirrors the structure already in place in Germany. Mr. Schwieger added: “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.”

The exchange will go-live with the new solution next year thus enabling firms to adapt their systems to the auction. In addition, the LSE stated that the midday auction will conform to current structures and that there will be no additional fee or extra direct cost imposed on customers in order to take part in the auction. The auction will apply to all SETS equity securities.

The LSE’s measure comes as no surprise to market participants, the largest trading firm has migrated its activity to dark pools in a bid to maintain anonymity, however, regulators have been viewing the role of dark pools as they pose a definitive threat to the disclosure of data in listed instruments.

The New Midday Auction in Practice

The auction process will be similar to the current framework that is used in the London Stock Exchange’s opening and closing auctions. At the commencement of the auction call at 12.00, all orders that have been parked for that specific auction will be injected immediately. Orders may then be entered, modified and deleted during an auction call, but no automated Execution occurs.

Throughout the entire period the London Stock Exchange will disseminate the most up-to-date indicative auction uncrossing price. This will be updated whenever orders are added, deleted or modified. At the end of the auction period, the balance of buy and sell orders will be used to calculate the uncrossing price and continuous trading will recommence.

Although the new process is expected to give the LSE some redemption from its competition with dark pools, the auction is limited to two minutes and traders will still have access to dark pools throughout the trading day.