Goldman Leads Banks With Stock Auctions as a MiFID II Workaround
(Bloomberg) -- Goldman Sachs Group Inc. is taking on the exchanges to win the business of fund managers eager to keep their stock trades hidden in the era of MiFID II price transparency.
The bank has set up a so-called periodic auction service that matched its first trades on March 21, allowing investors to buy and sell shares without tipping their hand to the rest of the market. Exchanges began offering the service earlier. Europe’s largest dark pool, run by Cboe Global Markets Inc., is now doing more business through periodic auctions than it is through its dark markets.
“The launch represents the first bank-led periodic-auction book,” David Shrimpton, a managing director at Goldman Sachs, said by email. “The product will enable our clients to trade in a fair, multilateral and transparent environment.”
Periodic auctions are increasingly seen as a way of sidestepping MiFID II’s curbs on dark trading. UBS Group AG will follow Goldman Sachs with its own service later this month, a spokeswoman said. Both firms are reacting to demand from their biggest customers. Fund managers need to complete their trades without moving share prices against themselves.
The auctions are coming to the fore because 755 European stocks are already banned from trading in dark pools, which hide orders until they have been matched. More names are likely to join that list when the European Union’s markets regulator updates it after the close of trading on Monday.
“Periodic-auction volumes will continue to increase,” said Mark Hemsley, chief executive officer of Cboe’s European arm. “The flipside is that our competitors are trying to get their own offerings out.”
Cboe’s rivals Investment Technology Group Inc. and Turquoise, a business run by London Stock Exchange Group Plc, have yet to disclose the volumes on their competing services.
The EU introduced caps on dark pools because they decided -- under intense lobbying from stock exchanges -- that dark trading reduced the efficiency of stock markets as a whole. Fund managers, however, still need ways of trading that keep all the best bits of dark pools, so trading venues and banks alike have reacted by coming up with new ways to trade. Rather than driving trading volumes to the stock exchanges, MiFID II may have forced the exchanges’ rivals to become more innovative.
Unlike normal stock trading, which starts in the U.K. at 8 a.m. and finishes at 4:30 p.m, periodic-auction services pause and restart trading throughout the day. Fund managers submit orders just as they do to a stock exchange, but their orders will not be matched until there are enough of them to trigger an auction. Orders are effectively hidden until the auction begins, so they cannot move share prices until the trade has been completed.
“We were never believers in the idea that it will all move on to exchanges,” said Rob Boardman, who runs ITG’s European business. “Periodic auctions had been relatively small. They were a bit of a solution looking for a problem.”
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