Plato Partnership Releases Independent Research on Closing Mechanisms in European Equities
Plato Partnership (‘Plato’), the not-for-profit member organisation bringing creative solutions and efficiencies to today’s equity marketplace, today published independent academic research shedding light on closing mechanisms in European equity markets. The study delves into the significance and impact of these mechanisms on market activity. Plato hopes that the findings will provide valuable insights for market participants, regulators, and the academic community.
The study conducted by Fatemeh Aramian, Postdoctoral Researcher at the University of Melbourne, and Carole Comerton-Forde, Professor of Finance at the University of Melbourne analysed data between January 2021 and September 2022.
Key findings of the research include:
Closing mechanisms account for approximately 18% of consolidated Euro volume in STOXX 600 stocks, second only to continuous lit trading.
Closing mechanisms gain significant market share on rebalance and month-end days, reaching 40% and 30%, respectively. Benchmarking practices among institutional traders are likely driving these increases.
Increased adoption of index and quantitative investment strategies, along with the rise of Exchange Traded Funds, has likely contributed to the substantial share of activity at the close.
On volatile and less liquid days, the market share of closing mechanisms decreases significantly.
Despite the emergence of competing venues, primary exchange closing auctions continue to dominate, representing around 84% of all closing activity.
Alternative closing mechanisms, such as SI guaranteed close and Aquis Market-at-Close, have garnered notable closing market share, accounting for approximately 11% and 4.3%, respectively.
The research highlights variations among closing mechanisms in price formation, pre-trade transparency, matching priority, and duration.
The research analyses extensive data spanning the specified period, focusing on European equity markets. It explores the reasons behind the limited adoption of alternative closing mechanisms, despite potentially offering lower trading fees. The findings uncover contrasting perspectives among market participants regarding market fragmentation's impact at the close and the ability to capture fee advantages.
Mike Bellaro, CEO of Plato Partnership, emphasizes the research's significance for the equities marketplace, saying, "Understanding the dynamics of closing mechanisms is crucial for market participants, regulators, and investors. This research sheds light on the evolving landscape and provides valuable insights into the factors influencing trading activity at the close."
The paper concludes with a policy recommendation, urging regulators to monitor trading fees charged by primary exchanges. The potential discrepancy in fees between closing auctions and continuous trading sessions may restrict participation and undermine the price formation process during the closing auction.
