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Bats tries to close in on NYSE/Nasdaq closing auctions

First Published 8th May 2017

If you can't close it yourself, peg it to someone else's close.

The second largest stock exchange operator in the US, Bats (now part of CBOE), is taking aim at the closing auction process on the primary listing exchanges NYSE and Nasdaq. The percentage of shares traded on the close has increased in recent years, coming up from about 5% in 2006 to almost 10% of ADV today.

Under RegNMS, only the primary exchange where a security is officially listed (as opposed to traded) can perform a closing auction. Because Bats is not a primary exchange for listing equities (it has some ETF listings, but they are rather marginal at the moment), they are effectively locked out of the closing auction market. In order to try to grab some of this market share, Bats is proposing a new order book (not a new order type) called the "Bats Market Close" or "BMC".

Orders entered into this book that are matched will later (after 16:00 NY Time) reference the primary exchange closing auction price of the day. Hence you get the closing price on NYSE or Nasdaq without having to send your order there. This should allow Bats to take some market share, provided that they can do it cheaper than the two incumbent exchanges. However, it is worth pointing out that limit-on-close and market-on-close orders are actually quite a bit cheaper than regular orders to execute (they cost about 70% less than intra-session orders), so it will remain to be seen how much improvement Bats can offer here.

Incidentally, this mechanism is very similar to the TAS (Trade-at-settlement) orderbook that is operated in some futures markets (e.g. CME and its various divisions). This functionality has garnered a fair amount of bad press over the years.