Dash for last orders on stock markets stirs concentration fears

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Fund managers are intensifying late-day dashes to trade shares in the US and Europe, raising concerns the heavy burst of activity leaves some of the world’s largest stock markets highly exposed during a malfunction.

The proportion of daily EU equities trading that takes place in stock exchanges’ end-of-day auctions hit a record 29 per cent in the first quarter, according to analytics firm big xyt. That compared with 22.5 per cent in the first quarter of 2021, the data provider said. The closing auction is a 5-10 minute period when final share prices of the day are set.

Europe’s sharp rise has been mirrored in the US, where 19 per cent of share trading took place in the closing auctions on stock exchanges in the three months to March, up from 12.5 per cent over the 2021 period, big xyt said.

Investors’ focus on doing deals in the final few minutes of the day has raised fears that the late surge leaves stock exchanges vulnerable if they suffer glitches.

The end of the day was becoming “totally divorced” from the rest of trading, according to a senior European exchange executive, who added that the venue was “starting discussions with big banks about the systemic risk of the last five minutes” and questioned his own marketplace’s “concentration risk”.

The boom in trading around the closing auction has largely been driven by the growing popularity of exchange traded funds and passive investing, which are benchmarked to the closing price of indices. The increased activity means active fund managers, who try to outperform benchmarks, can also move large blocks of shares without their deals being detected by high-speed traders.

The significance of passive investing is particularly pronounced on days when large indices are rebalanced. On May 31 US index provider MSCI rebalanced its indices, leading to 68 per cent of European equities trading and 43 per cent of US equities trading taking place at the close on that day, according to big xyt.

Trading executives are mostly concerned about the impact of an outage during the closing auction, like the one that hit European exchange group Euronext in October 2020.

“The nightmare scenario for the market is an exchange outage on the day of a major index rebalance that prevents the incumbent from running its closing auction,” said Natan Tiefenbrun, president of North American and European equities at Cboe Global Markets.

The UK’s Financial Conduct Authority said it was aware of the increased activity at closing auctions, and was assessing how venues should manage outages as part of its review of secondary markets.

“The more you concentrate trading . . . at one point in time, the more important it is to manage operational risk,” said the European Securities and Markets Authority, the pan-European regulator. It added it was monitoring “how trading on closing auctions impacts price formation”.

Executives are also growing concerned that the heightened activity is sucking liquidity from the rest of the trading day, which is eight hours in Europe, and six and a half hours in the US.

“The closing auction is now massive,” said Kevin Tyrrell, head of equities at the New York Stock Exchange. “The open is more challenged,” he said, adding that the NYSE was “actively working with institutions to grow participation”.

Traders warn the thinner activity was making it more difficult to trade. The volume shift had led to “larger intraday spreads and increased volatility during continuous trading”, said a senior trader at a fund manager.

Large trades also become more conspicuous, he added. “Anything 3 or 4 per cent of our daily volume is detectable by high-frequency traders, and the market moves away from you,” the trader added.

“It’s a feedback loop,” Tiefenbrun added. “More liquidity at the close drives people to trade more at the close.”

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