On the regulatory front, a handful of new policies are set to affect the options market and will likely enhance transparency, execution, and market data. Meanwhile, the cash equities business has hit a level of maturity and we are now trending toward better tools for block crossing and less resource intensive methods of trading.
Please find this article referenced in the Wall Street Journal. Responding to many client requests, the FX team at ITG Analytics reviewed trade data surrounding the WM/Reuters London Closing Spot Rate Service (“the fix”). By observing the factors that influence…
ITG Financial Engineering has recently completed its R&D work on international stock specific intraday volume profiles, extending its robust estimation methodology to common stocks and several other security types to cover more than 50 markets around the world.1 The intraday volume profiles, which include the estimated percentages of the daily volume to be traded in each 15-minute interval of the continuous trading session and at the and closing call auctions, are estimated for individual securities traded on each market and can be used for efficient execution of large orders. The U-shape of the intraday profiles is an important stylized fact, which is largely robust to the execution mechanisms in individual markets and well documented for most of stocks traded in various market environments.2 Many popular trading tools such as the volume-weighted average price (VWAP), participation rate (PWP), and implementation shortfall (IS) algorithms require the intraday volume patterns as key inputs.
The opening (market-on-open, or MOO) and closing (market-on-close, or MOC) call auctions, as implied by their names, take place at the beginning and the end of the core trading session. Both auctions have periods when orders can be entered, modified or cancelled but trades do not take place until the call time. During those periods, an equilibrium price at which trades would be executed if the auction period ends is calculated in real time according to the rules capturing the interaction of demand and supply in the market.
MOO and MOC weights and the intraday volume profiles in general became an important part of the modern toolkit used in pre-trade and post-trade analytics. For instance, intraday weights are utilized in pre-trade models to calculate implementation shortfall for VWAP-style execution strategies. These weights are also built into the interface of ITG’s Smart Trading Analytics (STA) to analyze the available volume at the opening and closing auctions for more than 50 markets around the world. Traders have to keep an eye on the MOO and MOC auction volume analytics for many other reasons:
a) More “natural” liquidity is usually available at and around the market opening
and closing times. Liquidity-seeking market participants may prefer trading
at MOO and MOC, close to the beginning and end of the continuous trading
sessions despite the elevated volatility risk at those times.
b) To avoid the risk of carrying a large position overnight, traders may want to
participate in MOC auctions, as long as it enables them to close the
unwanted positions without incurring substantial price impact.3
c) Index and mutual fund managers often benchmark their executions to the
opening and closing prices, hence may be incentivized to fill large portions
of their orders at MOO or MOC.
In what follows, we discuss the differences in shapes of the intraday volume patterns
and, especially, the MOO and MOC percentage volumes across the most important
markets around the globe.
The fractions of daily volumes traded at the opening and closing auctions for individual stocks are intrinsically noisy and fluctuate significantly over time. However, the average fractions of the daily volumes traded at MOO and MOC, where the averages are calculated for the given ticker over prolonged periods of time (more than 3 to 12 months), are relatively stable. Figure 1 shows the time series plots of the percentages of daily volumes traded at MOO and MOC for British Petroleum (ticker BP) during the period between December 2012 and December 2013, as well as their 60-day moving averages, which generally fluctuate in the vicinity of 1% for MOO and 16% for MOC and exhibit no apparent trending behavior. The highlighed points on the plots correspond to the special trading days such as option expiration days, Federal Reserve OMC meeting days, last days of the month, and U.S. market holidays.
These special days generally exhibit different liquidity patterns in comparison to the regular days, and are excluded from the sample used for estimation of MOD and MDC weights.
Figure 2 presents the stability plots for the MOO and MOC percentage volumes for the most liquid common stocks traded in each country. The estimated percentage volumes traded at MOO and MOC are measured over two non-overlapping one-year time periods – 2012 and 2013 – and plotted against each other. As can be inferredfrom the concentration of points on the stability plots along the 45-degree diagonallines, the percentage volumes traded at MOO and MOC auctions remain quite stableover time. Only a handful of stocks exhibit big changes in their MOO and MOC auctionpercentage volumes.
Even though the key underlying mechanisms of the closing and opening auctions are similar across the markets, the rules, design, and details of the implementation of the auctions may vary substantially. For example, some stock exchanges such as SIX Swiss Exchange and Bolsa de Madrid do not hold closing call auctions for ETFs. Many exchanges only allow sufficiently liquid securities to participate in their end-of-day call auctions. Some markets allow for extensions to their auction call periods during the closing auction under some circumstances.4 In contrast, the stock exchanges in Germany, Australia, and Sweden have a fixed duration for their call periods. Some markets allow market-on-close, limit-on-close, and other order types to be submitted at any time before the close, while other markets lock all the MOC orders submitted, allowing only offsetting limit-on-close orders once the net imbalance has been publicly disseminated. Details of the rules pertaining to opening and closing call auctions can be found on the exchange websites.5
1. Details of the stock universe and some relevant summary statistics can be found in Tables 1A-1E of the Appendix.
2. Recently, the intraday volume patterns became more reminiscent of a J-shape, as the percentage of trading immediately before the market closing has been on the rise in last several years. For international markets with mid-day lunch breaks, the intraday volume profiles are typically W-shaped.
3. MOC orders should be used with caution, since details of the closing price determination can depend on market- and security-type. Depending on the design of the closing auction, the fill of an order submitted for execution at MOC may be not guaranteed.
4. London Stock Exchange can extend the call period up to three times, invoking either a market order extension (when the indicative auction match price results in unexecuted market orders) or a price monitoring extention (when the gap between the indicative auction match price and the reference price exceeds pre-specified parameters). Toronto Stock Exchange extends its call period by ten minutes if the calculated closing price exceeds the volatility parameters determined by the exchange. BM&F Bovespa allows its closing auction to be extended by one minute multiple times whenever there are changes in the theoretical price, quantity, new offer modifying the taken quantity, and balance not taken up.
5. For the U.S. and Canadian markets, see also the ITG articles http://www.itg.com/news_events/ papers/Inside_Opening_Auction.pdf, http://www.itg.com/2012/11/07/trading-around-the-close/ and http://www.itg. com/2012/04/18/coming-changes-to-the-canadian-market-on-close-facility/.
The term ‘TCA’ has now become so common across the industry, and some would argue commoditized, that its value is in danger of becoming misunderstood. While most buyside firms use some form of broker post-trade analysis to measure how they’ve performed against their benchmark, the firms who are out-performing versus their peers are using a broader approach of pre-trade, real time and post-trade analytics to answer questions about how and why trading costs are incurred, and what actions can be taken to reduce them.
Our analysis of Canadian equities order flow this quarter indicate that HFT activity has scaled back slightly: total order flow reduced, Order-to-Trade ratio decreased, Volume Traded-to-Order ratio increased, and the rate of order activity has slowed down. We also add to the debate over the cost of real-time market data – we describe an objective method to intrinsically value market data using three core factors. How much should market data be valued?