Cboe approval shakes up stock market’s closing auction

Discussion in 'Wall St. News' started by ajacobson, Jan 18, 2018.

  1. Regulators have given Cboe Global Markets approval to create an alternative to closing auctions for the US stock market, in a victory for the exchange that could shake up one of the most important moments in the trading day. The decision by the Securities and Exchange Commission, late on Wednesday, is a blow to the New York Stock Exchange, a unit of Intercontinental Exchange and Nasdaq, where nearly all companies list their shares and for whom the closing auction has guaranteed a certain amount of trading volume. While US equities trade on about a dozen exchanges and through a myriad of dark pools during the trading session, the official closing price is set through the auction on a company’s home exchange. The new regulatory approval allows Cboe to launch what it calls the “Cboe Market Close”, which will match trades using the closing price set on the home exchanges, potentially luring volume away from its rivals. Cboe argued industry participants were frustrated with closing auction trading fees, which it said have increased between 16 per cent at NYSE and 60 per cent at Nasdaq over the past five years. “It is a big win and a significant change in market structure,” said Larry Tabb, founder of the Tabb Group, a capital markets consultancy. “To the extent that 8-10 per cent of volumes is at the close, that is 8-10 per cent [Cboe] does not get, but now has access to,” Mr Tabb said. “It could be an impactful aspect of their trading revenues.” Cboe equity exchanges are second to NYSE in terms of volumes traded, but can boast only one corporate listing: Cboe’s own shares. With the growth of index investing and exchange traded funds, the closing auction has become an even more critical part of the overall system, since ETFs need to create or redeem shares by the close of trading. Volume executed in the auctions rose more than 70 per cent between 2012 and 2016 — meaning a growing portion of trading is increasingly expensive. “Cboe Market Close was created in response to widespread industry frustration with existing closing auctions,” said Bryan Harkins, head of US equities and global FX at Cboe, in a statement. Given the increasing importance of the closing auction . . . and the apparent concerns that a competing facility could have unintended consequences, we respectfully advise great caution Alex Matturri, chief executive, S&P Dow Jones Indices The SEC approved Cboe’s plan against opposition from NYSE and Nasdaq. A NYSE spokesperson declined to comment on whether the exchange would appeal the regulator’s decision. “The NYSE Closing Auction is consistently the largest daily liquidity event globally thanks to its unique mix of technology and human judgment that reliably delivers the best outcome for listed companies, investors and index providers,” they said. Nasdaq declined to comment. Large fund managers, such as T Rowe Price, and listed companies including FedEx also opposed the approval of Cboe Market Close. For their part, S&P Dow Jones Indices, the owner of the benchmark S&P 500 and other indices widely tracked by ETFs, urged caution. “In keeping with the overall ethos of passive investing, SPDJ applauds any measures that decrease costs, increase transparency and generally result in greater utility for investors,” said Alex Matturri, its chief executive, in a letter to the SEC. “However, given the increasing importance of the closing auction to those same investors, and the apparent concerns that a competing facility could have unintended consequences, we respectfully advise great caution in approaching any changes to this aspect of our market structure.” Supporters included Sifma, the US trade group for the securities industry, rival exchange IEX and market maker Virtu Financial.
    jtrader33, d08, Handle123 and 2 others like this.
  2. truetype


    An uncredited cut/paste from FT. Keepin' it classy!
    lawrence-lugar likes this.
  3. d08


    Finally, some competition. I'd happily route away from the crooked two (NYSE/NASDAQ) but how is the matching done?
    Because the key reason for closing auctions is the liquidity, I don't see how there would be any real liquidity if it's just another venue. Take look at NASDAQ auctions on NYSE listings, there's almost nothing.

    Cboe will provide an alternative for market-on-close orders, which execute as soon as a closing price is published at the end of the day. Any orders that Cboe can’t match will be sent to their primary exchange.

    So as I understand, what's matched executes on CBOE while the remainder goes to the native exchange auction (or is it submitted to continuous after-market?)
    Last edited: Jan 19, 2018
    aldrums likes this.
  4. truetype


    Agreed, it's unclear from the press reports so far.
  5. But I wonder how they will charge less than the primary exchange that way. Or I guess maybe CBOE just loses money on days where their own auction is imbalanced and they eat the loss to send it to the higher priced primary exchange?

    Either way, it's good to see some price competition.
  6. d08


    I'd be surprised if they do that. Though I doubt there's a way to have "dynamic" pricing (charge X amount for CBOE matched and Y for NYSE) with brokers.

    Absolutely agree that competition is much needed in this era of ripoff pricing.
  7. d08


    By Alexander Osipovich, WSJ
    01/25/2018 - 09:39

    The New York Stock Exchange and Nasdaq are making a last-ditch effort to retain their grip on the crucial 4 p.m. closing auctions that determine end-of-day prices for thousands of stocks.

    The two big exchange groups will appeal a regulator’s decision that would allow a rival, Cboe Global Markets, to siphon off trading activity from the closing auctions for NYSE- and Nasdaq-listed securities, threatening the two firms’ revenues from trading fees. The duo revealed their plans to keep fighting Cboe’s plan in filings posted late Wednesday on the website of the Securities and Exchange Commission.

    Last week, SEC staff gave Cboe the green light for its closing-auction proposal, despite fierce opposition from the NYSE and Nasdaq. With their latest move, the two exchange groups will seek to have the SEC’s five commissioners reconsider that decision.

    Under Cboe’s proposal, traders would get a new way to execute “market-on-close” orders, in which they agree to buy or sell shares at whatever end-of-day price is determined in the auction. Instead of sending such orders at the NYSE or Nasdaq, traders could send them to Cboe, which would seek to fill them using the day’s final price published by its competitors.

    A NYSE spokeswoman said in an emailed statement that Cboe’s plan was “not in the best interest of issuers and investors.” A Nasdaq spokesman said: “Issuers, indexers and investors have all filed comment letters against this proposal… it is our duty to ensure they are heard and accounted for.” The SEC declined to comment.

    Earlier, the NYSE and Nasdaq had argued that Cboe’s plan would harm the integrity of their closing auctions and enable market manipulation. Cboe, the number-two U.S. stock-exchange operator by volume, has dismissed such worries as “fearmongering.” The Chicago-based firm says it’s trying to help traders save money after both the NYSE and Nasdaq hiked fees for participating in the closing auction in recent years.

    Such benefits will be delayed as a result of the NYSE and Nasdaq’s appeals, said Bryan Harkins, head of U.S. equities and global FX at Cboe. “We look forward to working with the Commission on a prompt resolution,” he said in an emailed statement.

    The squabble comes as closing auctions have grown more important to the functioning of U.S. markets, largely due to the rising popularity of exchange-traded funds and passive investing strategies. That’s because index-fund managers will typically seek to track the daily settlement price of the stocks that comprise their index. That often leads them to buy or sell shares in the closing auction, as they try to come as close as possible to that end-of-day price.

    Last year, 6.5% of the volume in NYSE-listed securities took place at the close, up from 3.6% in 2012, according to the exchange. For Nasdaq-listed securities, the share of volume at the close rose to 5% from 3% over the same period, according to Nasdaq.

    Closing auctions are one of the few areas where the NYSE and Nasdaq are still insulated from competition. During regular trading hours, from 9:30 a.m. to 4 p.m. Eastern time, a stock can be traded on any of a dozen U.S. exchanges and numerous off-exchange “dark pools.” But at the close, it reverts to the exchange where it is listed. That means the NYSE has an effective monopoly on closing auctions for shares of companies listed on the Big Board, while Nasdaq has a similar grip on closing auctions for Nasdaq-listed stocks.
  8. sprstpd


    Summary: NYSE and Nasdaq claim competition is bad for traders/investors.
    d08 and MoreLeverage like this.
  9. d08


    Exactly, the supposed bastion of capitalism is telling us competition is illegal.
    Van_der_Voort_4 likes this.
  10. d08