The Benefits of European Periodic Auctions beyond MiFID Dark Trading Caps

Abstract

Initially designed as a better alternative than dark trading, the success of periodic auctions has spread across all European stocks. On capped stocks, the market share of periodic auctions rose from 1 to 4.5 percent between early March and September 2018. Nevertheless, on uncapped stocks, periodic auctions doubled in popularity from 0.75 to 1.5 percent over the same period. The random auction end time prevents adverse selection, as shown by the price reversion. In lit and dark trading, passive buy trades are followed by a strong drop in midpoint due to the aggressive sellers. In contrast, periodic auction trades show almost no sign of adverse selection. This feature derives from the random end time of the auction, which creates a level playing field for all market participants. Based on Kepler Cheuvreux trades, this study shows that periodic auction participation mitigates the market impact. In addition, using public market data, this study shows that, on average, trading intensity diminishes after a periodic auction trade while it increases after a dark trade. TOPICS:Exchanges/markets/clearinghouses, security analysis and valuation, developed markets, performance measurement