Stock market auctions should drive broker innovation - Norway wealth fund

By Terje Solsvik

OSLO (Reuters) - The sharp rise in trading volumes during closing auctions at global stock markets requires more innovation by brokers to capture value for buy-side investors, one of the world's largest asset managers said on Tuesday.

Norges Bank Investment Management (NBIM), which runs Norway's $950 billion sovereign wealth fund, said the growing popularity of end-of-trade auctions reflects deep structural changes, including that more money is managed by bigger firms.

Gradually introduced by major stock markets since the late 1990s, auctions held in the final minutes of trade were initially seen as an efficient, hard-to-manipulate way to establish end-of-day prices.

The percentage of daily trade taking place in those final minutes roughly doubled between 2014 and 2019 in both Europe and the United States however, NBIM's calculations show, turning them into major trading opportunities with ample liquidity.

"The shift in volume from intraday, continuous trading to the closing auction in recent years is structural in nature and goes beyond the often-cited growth in 'passive' investing," the influential investor wrote in a rare comment on the industry.

London's FTSE100 is leading the way and now nearing 30% of daily share volumes traded in the closing auction, followed by France's CAC40 and Germany's DAX in the low-to-mid 20s, while the U.S. S&P500 last year hit 9%, up from 5% in 2014, NBIM said.

But the changing investor habits require, in turn, different approaches by brokerage firms, who must tailor algorithms not only to a different way of trading but also to the individual auction processes of each market, the fund added.

"As a client, we are focusing on several potential differentiators in broker offerings," NBIM said, while emphasising that this also offers a business opportunity to smaller sell-side industry players.

"We believe that further development work by brokers is required, both in the forecasting of auction volume and in order submission and signalling strategies – designing opportunistic trading strategies that evaluate the evolution of available liquidity at the close," NBIM said.

While the recent plunge in global stocks also caused a sharp rise in volatility, it did not change the conclusions.

"(The) recent crisis has not affected our view – in fact we have seen resilience of financial markets so far across various trading mechanisms, and in the closing auction," the fund manager said.

"Closing auctions have remained a major part of the trading day in percent terms even during the highest-volume days," it added.

(Reporting by Terje Solsvik, editing by Gwladys Fouche)