Pages: 54

Publication: 25 January 2021

Authors: Paul Besson, Head of Quantitative Research and Raphael Fernandez, Quant Research Analyst

Strong rise in the market share of closing auctions

The strong rise in the market share of closing auctions observed from 2008 to 2020 has attracted much interest from market participants, as well as from regulators and academics. 

While most commentators attribute this rise to the growing share of ETFs, very few publicly available research papers study the market impact of trades executed at the Close. 

As best execution enforcement strengthens across all investor types, we believe that the cost of trading at the Close is a key driver in understanding the strong increase in closing auction market share. We also believe that the recent growing popularity of alternative mechanisms for trading on Close raises new systemic questions concerning the quality of the prices in closing auctions.

The TRADE Roundtable discussing trading at close 

Listen to this roundtable in four parts organised by The TRADE News where Euronext’s Paul Besson and other experts at Sell-Side and Buy-Side firms discuss trading at close.

1. The key drivers of growth for rising volumes at the Close
2. Implicit and explicit costs for trading at the Close in comparison with the Continuous markets
3. Impacts of the migration to the Close on the Continuous trading day
4. And how institutional investors can navigate these changing liquidity patterns

The Euronext Quant Research report on trading at close

In 2020, closing auctions market share represented more than 20% of European consolidated volumes. Surprisingly, almost no publicly available market impact model on closing auctions is available, although the continuous market impact has been extensively studied. As a market operator we share with all market participants the findings of our unique dataset. In particular we evidence four main results on closing auctions:

• We highlight that indicative prices overreact on average during Call phases and that this pattern is explained by the temporal imbalances of Market and Limit orders (see Figure 13, p13 and Figure 16, p15 of report).

• We describe the instantaneous impact and its subsequent decay following a Market order submission (see Figure 19, p18). We show that early order submissions have less price impact than later submissions (see Figure 23, p21 of report).

• We establish a market impact model on Close for Market orders. We show that for a given trade size, the resulting market impact on Close is two to three times smaller than it is for continuous trading (see Figure 25, p26 and Figure 26, p27 of report). This comes as no surprise as the Close represents the most liquid event in equity markets.

• Lastly we raise the question of the internalisation of Market orders and its adverse consequences on auction volatility, as shown by the increasing standard deviation of the Jump on Close when the share of matched Market orders decreases (see Figure 30, p31 and Figure 32, p32 of report)

Euronext Quantative Research report

Download Better trading at the close thanks to market impact models

Euronext Market Insights webinar about trading at the close

The focus is on Quantitative answers to key questions on trading at the closing auction on Euronext Equity:

• Are closing auctions a cheaper way to trade large orders compared to continuous trading?
• Is earlier sending of Market Orders beneficial to reduce the market impact on close?
• Is the internalisation of On Close Market Orders detrimental to auction volatility?
  
  
  
  
  
  Watch the replay

2020 was an exceptional year in terms of volatility in Europe, reaching the levels of 2008 (measured by the CAC 40® Volatility Index or VCAC). Over the course of 2020 and 2021, volatility has remained higher than the average of the last five years.

As volatility increases, market quality deteriorates across all venues. However, analysis of this phenomenon is scarce, despite the fact that it is during highly volatile periods that market quality matters most for investors.

In this document, Euronext provides a short market quality analysis in order to tackle this lack of information, while opening the door for further research.

Euronext Equity Market Quality Analysis report

A short analysis, demonstrating that in times of heightened volatility, Euronext's equity market remains resilient and provides the best market quality for its listed stocks, and proving the benefits of Euronext’s liquidity schemes for investors. 

Executive Summary

• Setting aside ‘black swan’ events such as March 2020, Euronext’s market quality remains resilient in periods of high levels of volatility compared to its main competitors.
• The deterioration in some metrics is far less on Euronext than on other venues.
• The impact of volatility on EBBO Presence and Setting is less noticeable on Euronext.
• The analysis demonstrates the benefits of Euronext’s liquidity programmes and the importance of the requirements in place for clients.

Methodology

• In this analysis, we select a basket of liquid securities that are listed on the Euronext Markets. The basket is made up of the component securities of the CAC40®, AEX® and BEL20®, the national blue-chip indices for France, the Netherlands and Belgium. By selecting these securities, we exclude the potential impact of illiquid securities. The data covers the period from 1 January 2020 to 9 September 2021.
• The market quality metrics used in the study are provided by BMLL Technologies. Three main metrics are examined: Spread, Liquidity at Touch and Time Presence at the European Best Bid & Offer (EBBO).
• The BMLL market quality metrics are then compared with the average annualised intraday volatility per security using the Garman-Klass volatility formula. Three buckets of volatility are identified, to take into account different market conditions.

Download Euronext market quality in times of volatility

The geopolitical tensions of 2022 are bringing back volatility to the markets.

Covid outbreak

The Covid outbreak in 2020 had already marked a turning point, with volatility at consistently higher levels than historically, translating into uncertainty over future expectations. From a microstructure standpoint, market quality is considered to be very sensitive to volatility: it is generally observed to deteriorate as volatility increases.

Ukraine and Russia

Nonetheless, based on empirical observations during the ongoing crisis between Ukraine and Russia, the overall equity market in Europe now seems to be more resilient to distortions driven by global events.

Market quality metrics

In this study, Euronext provides a short analysis comparing the market quality metrics in 2020 during the first wave of the Covid-19 outbreak and the recent market turmoil in 2022 caused by the Ukraine-Russia crisis.

Euronext Equity Market Quality Analysis report 

In this report, we observe that since early 2020, volatility and equity trading volumes have skyrocketed due to global markets turmoil, but European market quality appears to be more resilient to distortions during the Ukraine-Russia crisis in early 2022 than during the first Covid-19 wave in 2020.

During these recent geopolitical tensions, Euronext has maintained stronger metrics than MTFs in terms of average spreads and EBBO Presence/Setting. 

This testifies to Euronext’s resilient market quality, proving again its reliability even in times of unprecedented levels of volatility.

Executive summary

• Since early 2020, volatility and equity trading volumes have skyrocketed due to global market turmoil, driven by the Covid-19 pandemic waves and the ongoing Ukraine-Russia crisis.

• European market quality has been more resilient to distortions during the Ukraine-Russia crisis in early 2022 than during the first Covid-19 wave in 2020.

• Even during the recent geopolitical tensions, Euronext has maintained stronger metrics than MTFs in terms of average spreads and EBBO Presence/Setting

Methodology

• Market quality metrics are analysed for CAC 40® constituents, which are among the most liquid and highly traded securities on Euronext and at pan-European level. By selecting this subset, we exclude the potential impact of illiquid securities.
• The data range covers two volatile periods: “First Covid wave” from 3 February 2020 to 30 April 2020, and “Ukraine-Russia crisis” from 3 January 2022 to 31 March 2022.
• The red dotted lines in the charts highlight the relevant dates during the two periods: 16 March 2020, the day the first lockdown was announced in France, and 24 February 2022, the beginning of the Ukraine-Russia crisis.
• Volatility is evaluated using the VSTOXX® Index (V2TX), which measures the volatility of the EURO STOXX 50 Index.
• The market quality data in this study is sourced by the independent provider BMLL Technologies, and three metrics are analysed: Spread, European Best Bid & Offer (EBBO) Setting and EBBO Presence

Download Is the Equity Market becoming more resilient to global turmoil?

By Trend and Hedgeclub, Kyiv

trendhedgeclub.com

Falling agricultural commodities prices affecting the Black Sea region

Poland is one of the largest agricultural producers in Europe, with agriculture accounting for 3.8% of its GDP. However, local Polish farmers have been facing some difficulties due to falling prices of agricultural commodities undermining the profitability. This is affecting not only Poland, but the entire Black Sea region. Some claim that the price fall was due to flows of grains from Ukraine.

Poland and Hungary ban grain and food imports from Ukraine

In response, Polish farmers, along with their fellows from Slovakia, Bulgaria, Hungary and Romania, have been organising protests and strikes, demanding government support and higher prices for their crops, pushing the Polish Minister of Agriculture to resign on 5 April.  Some farmers have taken their protests a step further by blocking the import of Ukrainian grain. Several politicians asked Brussels to apply duties and quotas on Ukrainian grain, but not oilseeds and their by-products. Such moves pushed Poland and Hungary to ban grain and food imports from Ukraine on 15 April, followed by Slovakia introducing similar measures on 17 April. Meanwhile, Poland and Slovakia will continue to allow the transit of grains from Ukraine through their territories. 

Concerning reactions from the market

However, the reaction in the market has been controversial. There were concerns and accusations that some politicians in Poland try to manipulate public opinion, taking advantage of the current situation in the market, ahead of the parliamentary elections to be held later in the year. This has also raised concerns about protectionism and trade barriers.

The EU authorities have also criticised such unilateral actions by individual member states rather than having an EU-wide solution.

What is the actual impact of grain imports from Ukraine on prices?

"The amount of grain from Ukraine [via Polish borders] was not significant compared to the local crop. About 800,000 tons of wheat and 1,300,000 tons of corn have been imported to Poland since March 2022. This is not such a large amount," said Andriy Abdulov, a grain trader with the Polish company Agrolok. 

Volatile grain markets in 2022

“At the beginning of 2022, grain prices skyrocketed in the global market following the Russia’s aggression of Ukraine. Then, the prices started decreasing in March 2022 when Poland, Romania, Bulgaria, Hungary and the Baltic States decided to help Ukraine to facilitate transit of grains from Ukraine by land to final destinations as the major Ukrainian ports were blocked by the Russian navy. The grain prices kept falling on the international grains market following the creation of the "grain corridor" in July 2022 that partly restored grain shipments from Ukrainian ports,” Andriy Abdulov said.

The prices in the Polish grains market have followed the trend in the global grains market. At the same time, Poland had one of the best crops in recent years, adding pressure on prices in the local market. Exports of wheat and corn from Poland significantly exceeded the volumes of the previous years.

Petr Ciecwierz, advisor to trading company MK Merchants, also emphasises that grain prices have decreased throughout Europe, though they remain at pre-war levels.

Euronext MATIF Milling Wheat Futures trade levels

Thus, Euronext Milling Wheat Futures trade around the same levels as at the beginning of February 2022, and well above the 10-year average:

The narrative behind falling grain prices

However, politicians began to use the narrative about falling prices. "We will have elections this year. The situation in agricultural markets is used by certain political parties and agricultural unions to pressure the government and get more subsidies. Not only the government, but also the political forces that are currently in the opposition, repeat the same narrative," says Petr Ciecwierz.

Are Ukrainian exports impacting Polish grain prices?

"Actually, different media sources provide different information, different data. Some politicians say that we [Poland] need to export 9 million tons of grains [to bring the stocks to usual levels], others estimate this number at 4 million tons. No one even knows how many those reserves are. Therefore, it is not true that exports from Ukraine became the main factor affecting the drop in prices and the situation in Europe," says the market participant.

Influencing market sentiment about Ukrainian grain

The second false thesis of Polish farmers is about the poor quality of Ukrainian grain and the lack of checks at the border. Petr Ciecwierz notes that there is standard quality control at the border when it comes to the EU. All agricultural products are controlled according to European standards.

"The problem is Moscow propaganda. Because agricultural media and social networks, where farmers participate, spread false information. The thesis that the grain that comes from Ukraine passes without control for pesticides, mycotoxins, and the content of insects is not true. The government tried to explain the situation, but it was very limited. They tried to refute such information, but no one listened to them," says Petr Ciecwierz.

Polish farmers putting pressure on the government on grain prices

He also notes that Polish farmers are pressing the government to solve their problems, buy grains from them at prices above the current prices or influence the trading companies buying from farmers to increase the prices. This would be completely against a free market principle. 

Another problem: Poland cannot export its grains to a number of North African countries, for instance to Egypt, as Poland cannot provide appropriate certificates for export.

Managing price risk effectively with the Euronext MATIF grain contracts

One of the solutions for farmers would be to manage the price risk in a more effective way to protect themselves from unfavourable price movements. Using diverse hedging strategies, farmers can lock in their selling price to the levels that ensure profitability. For instance, Euronext MATIF Milling Wheat Futures dropped by about €20 between 1 March and 11 April while the drop was more than €70 since August when most wheat was harvested. If farmers fixed the price of their crop between August and March by selling futures, for instance, they would achieve significantly better performances.

By Trend and Hedgeclub, Kyiv

trendhedgeclub.com



 

This publication is for information purposes only and is not a recommendation to engage in investment activities. This publication is provided “as is” without representation or warranty of any kind. Whilst all reasonable care has been taken to ensure the accuracy of the content, Euronext does not guarantee its accuracy or completeness. Euronext will not be held liable for any loss or damages of any nature ensuing from using, trusting or acting on information provided. No information set out or referred to in this publication shall form the basis of any contract. The creation of rights and obligations in respect of financial products that are traded on the exchanges operated by Euronext’s subsidiaries shall depend solely on the applicable rules of the market operator. All proprietary rights and interest in or connected with this publication shall vest in Euronext. No part of it may be redistributed or reproduced in any form without the prior written permission of Euronext. Euronext refers to Euronext N.V. and its affiliates. Information regarding trademarks and intellectual property rights of Euronext is located at https://www.euronext.com/terms-use.

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