Curatia Analysis for Wed, May 26, 2021
More Inclusive Opening Auctions Make Better Markets for All Sponsored
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Chuck Mack
Head of U.S. Equities, Nasdaq |
No-fee investing and mobile-trading apps have reforged markets, reducing trading friction and attracting more retail investors than ever before. But since much of that new activity occurs off-exchange, it is inaccessible to institutional investors, a missed opportunity to improve prices and certainty of execution for all market participants.
By extending its opening auction and disseminating imbalance information to investors earlier, Nasdaq is uniting retail and institutional investors to improve prices and certainty of execution for both — and pioneering a more collaborative future that includes all market participants.
9:30 a.m. Market Open
A mesmerizing skill that always intrigued me is that of the traditional fast-talking auctioneer. Scanning a crowded room, an auctioneer has to take competing bids and make counter offers at a rapid pace, keeping all participants informed in real time. The rapid-fire stream of words coming from the auctioneer sounds like a special language that few can understand and even fewer can speak. It is a form of financial performance art, albeit one that serves a function necessary for that kind of dealing.
Auctioneers provide an integral function for the legacy manual markets where one might see a herd of cattle or a prized painting change hands in a short space of time. As amazing as the auctioneers are, they are a throwback to earlier times. A horse-drawn carriage is great for tourists, but you wouldn’t commute to work in one.
Today, people enter all kinds of auctions millions of times per day. Thankfully, through technological innovation and electronification, they can do so much more efficiently whether they are bidding on vintage vinyl records or buying financial securities.
In today’s equity market, people don’t listen to a super-fast official ready to gavel a final sale, but the market opening auction is an extraordinary part of every trading day. Instead of needing to be in the room with an auctioneer, Nasdaq disseminates information transparently to anyone who wants to consume it, thus creating market quality and efficiency that not even the most skilled quick-talking auctioneer could compete with. It is more than just buyers and sellers coming to market, it is different populations of investors coming to trade and getting a chance to interact.
Every Auction a VIP Auction
With increased market participation, the opening auction’s importance has grown immensely. Many of the orders that come to the auction early in the day are orders from individual investors who may place them via retail-trading platforms during off hours.
This surge in participation has increased demand from all sides on the opening cross. The use of the Nasdaq Opening Cross has grown significantly from pre-COVID-19 levels to today.
Nasdaq has seen historic volumes over the past year as pandemic volatility, increased individual investor participation, and social media-fueled “meme stock” interest brought enormous volumes to market. Volume on the opening cross has more than doubled since January 2019. Importantly, even as consolidated volume has grown to historic levels, open volume as a percentage of total consolidated volume (TCV) has grown by nearly 40%.
More Participants Make Better Markets
Because this auction and this interaction are so vital, Nasdaq elected to enhance its opening auction to enable greater participation. The virtual auctioneer of the market’s opening cross can now address a larger group of buyers and sellers, and the whole system is better for it.
On May 17, Nasdaq equity exchanges began early dissemination of opening auction imbalance information and allowed investors to enter orders closer to the time of the open. This approach gives traders more time to enter Market-On-Open orders and Limit-On-Open orders, and they will do so from a more informed position, with auction data at hand. This means more information will be available to investors, who will have greater opportunity to participate in the open.
And allowing for more time helps these participants form a better picture. With more time to absorb imbalance information and remove limitations for our on-open order types, investors can expect better price discovery.
It’s an issue we’ve been working on for the long haul, well before retail-trading platforms’ move to zero commissions, and follows changes to the Nasdaq Closing Cross in 2019.
Benefits for Institutions, Main Street, ETFs
The changes are far-reaching and have a particular appeal for Main Street investors and the institutions that seek to interact for them. The opening auction is where institutions have the most opportunity to interact with retail orders that play an increasingly important role in the markets. An expanded and more inclusive opening cross enables greater interaction between institutional and individual investors.
As with individual securities, the opening auction is equally important for ETFs and other exchange-traded products. These ETPs will reap the benefits as their underlying securities and the products themselves will be better equipped to adjust to imbalances in the markets. The ETP industry supported this change, as it’s been noted to benefit the ETP ecosystem in particular.
The greater number of participants in the opening cross also boosts its liquidity, and liquid markets have been a driving engine of market growth and market accessibility. The more buyers and sellers in the segment, the more liquid the environment. Overall, the transparent pricing information disseminated by Nasdaq enables high levels of Main Street investor involvement in equity and options markets.
By improving price discovery and liquidity, these enhancements will drive more participants to Nasdaq’s opening auction, further bolstering price discovery and liquidity in a virtuous cycle.
Best Auctions for Best Markets; Everyone Wins
We saw related success a few years ago with enhancements to the Nasdaq Closing Cross. In light of that success, this change is universally supported by many kinds of market participants. It’s a win-win situation where investors seeking liquidity will have better execution outcomes and investors will have better opportunities to provide liquidity.
Traders that place orders on Nasdaq’s Opening Cross have confidence that the enhancements have made the start of the trading day even better, with more information from a larger population of participants taking part in the price discovery process.
Today’s equity investors may not be getting the same entertainment value that a speed-talking auctioneer provides, but the upgraded Nasdaq Opening Cross serves an even larger population of investors more democratically and efficiently. Investors arrive each day with confidence that the equity markets open with the greatest quality and integrity and fairness to all.