According to a new study on trading behaviour in the post-Mifid environment by pan-European brokerage CA Cheuvreux, the increase in the number of new trading destinations has had a profound impact on optimal trading strategies, as the particular market structure rules of trading venues and their different trading participants have directly affected the intra-day behaviour of stocks.
According to Cheuvreux, new MTFs increase the relative liquidity difference between continuous order book trading and fixing auctions because they mainly target continuous order book trading liquidity. Fixing auctions usually represent 15.6% of continuous phases but because the typical time ratio between the continuous auction phase is in the region of eight-and-a-half hours compared with just two five-minute phases, fixing auctions are far more liquid than continuous ones. This has a big impact for mark-to-market funds for which the closing price is the reference price.
More liquidity
The fact that there are more arbitrageurs and algorithmic traders trading on UK stocks than on French ones or German ones means new trading destinations, mainly targeting the continuous auction phase, will potentially attract more liquidity on UK stocks than on French or German ones – a result seen by the relatively better market share of FTSE 100 stocks.
Tick sizes also have a clear impact on trading efficiency. The more the tick size of a trading destination forces the premium for liquidity consumers to be high, the less attractive this trading destination will be compared with another with a lower tick size. As a result, the arrival of alternative trading venues with smaller tick sizes has put pressure on existing exchanges to lower theirs. Euronext has lowered its tick sizes twice this year to meet competition from Chi-X.
Efficient strategy
From an intra-day trading point of view, falling tick sizes will change many things. When tick sizes are larger, traders who need fairly fast execution will be forced to use market orders. Whereas with a small tick size, someone who wants fairly fast execution can, for example, improve the best bid (if willing to buy), and a liquidity provider has much more space for its strategy. In a large-tick-size environment, waiting for the best offer is an efficient strategy but in a small-tick-size environment, progressively crossing the spread is a better option than taking a market risk. As tick sizes fall, therefore, traders seeking to achieve a volume-weighted average-price execution are better off paying more attention to tactics (the way orders are placed in the order book and their place in each queue), and less to strategy (the way to slice volume over the whole day).