Trading on the London Stock Exchange will be halted mid-session for the first time in more than 200 years in a bid to protect its biggest customers from “flash boy” high-frequency traders.
The LSE has two “auction” periods at the beginning and end of the day’s trading when share orders are submitted, but stock prices are frozen while buyers and sellers are matched to fix an opening and closing price.
Institutional investors such as pension funds have taken advantage of these opaque pricing periods to sell large blocks of shares without signalling their intentions to the wider market and allowing the high-frequency traders exposed by author Michael Lewis’s Flash Boys book to move prices against them.
The bigger market fish have increasingly traded in so-called “dark pools”, private exchanges run by big banks, in recent years to avoid the HFTs.
In response the LSE has proposed a new two-minute auction at midday from late next year, allowing the biggest investors to shift blocks of shares while the price remains frozen.
The LSE’s head of equities Brian Schwieger said it was a “very significant change” to the trading day: “The introduction of the intraday auction is in direct response to demand from buyside participants for neutral, infrastructure-led solutions for trading in large blocks. The auction will allow participants to place orders in a truly confidential, yet price-forming environment via a well-understood mechanism.”
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The LSE hopes this will help reverse the trend of a falling average size of trade on the market over the past 10 years from around £20,000 to between £5000 and £7000.
The average size of trade carried out in the auction is around £30,000 as the bigger fish enter the market without pushing up prices.
One dealer said the new auction would have a limited impact: “The problem with this is that institutional investors have a full day to use dark pools so why should an extra two minutes at midday help?”Reuse content