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BATS auctions off the block problem

There has a been a lot of talk about how to trade blocks that are smaller than the LIS waiver but that are still too big to go to regular lit markets. The debate has been ratcheted up by the 4 and 8% dark pool caps that are part of the MiFID II spectre looming above us all. One approach, of course, is to chop your block into smaller pieces with an algo but this is becoming increasingly unattractive in an HFT-dominated world.

Venues like Turquoise have done their bit to help solve for this with their innovative Block Discovery service which has been gaining momentum steadily.

Now it looks like it’s the turn of the clever folks at BATS who have come up with another novel approach to the problem. Its soon to be launched Periodic Auctions Book offers intraday auctions that operate within an EBBO collar. This matches orders on a price/size/time basis through random auctions. What’s particularly cool about its approach is that the frequency of the auction can be dialled up or down to reflect the underlying liquidity in a stock. Because it’s a lit book it will never get tripped up by those pesky MiFID caps and the auction helps protect information leakage that would otherwise occur trading large blocks on a lit market.

Naturally, any innovation in trading depends upon its widespread deployment, but BATS should be credited with an imaginative approach to a real industry problem.

2 Responses to “BATS auctions off the block problem”
  1. David Morgan says:

    I do like the new BATS proposal – frequent auctions randomize timing, size priority makes latency arbitrage less attractive – all in all this discourages various types of predatory behaviour.

    But is BATS really being innovative here? Didn’t LSE Group beat them to it with Turquoise Uncross and Oslo with North Sea? Or is your point that BATS will count as Lit whereas the others fall under the 4 and 8 rule as dark venues?

  2. steve grob says:

    Its not my position to judge, David, but I guess the real point is that we need innovative solutions to the market structure problems the industry is facing.

    At the end of the day, the market will decide the best way forward

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