Bourses face closing auction challenge from Aquis

The dominant and lucrative business of settling closing share prices enjoyed by Europe's incumbent stock exchanges faces a challenge from a UK start-up being backed by investment banks and asset managers.

Many investors prefer executing share trades at the closing price and this is often the busiest time of a trading day. Established exchanges benefit from such activity and arrange auctions that ascertain the closing price, valued by institutional investors.

With the aim of reducing trading costs for investors, Aquis Exchange, a London-based start-up, has been granted UK regulatory approval for a new order type that would guarantee users of the venue the same price that emerges at the end of a closing auction on the London Stock Exchange, Deutsche Borse, Euronext and others.

Aquis's push is being backed by Legal and General Investment Management, Societe Generale and Instinet, the agency broker, with other asset managers close to signing up, according to Alasdair Haynes, chief executive of Aquis.

"This is a major development for the market," he said. "It's the first real competition to the closing auction," he added.

Auctions account for nearly 30 per cent of the LSE's total daily trading volume and around 23 per cent at both Deutsche Borse and Euronext, according to a report by Market Structure Partners, a capital markets consultancy. Its head, former Merrill Lynch trading executive Niki Beattie, is also chair of Aquis.

Auctions can be a lucrative area for some exchanges since they charge investors a percentage of the size of trade.

For example, during continuous trading hours the average size of order on the London Stock Exchange is about £5,000 to £7,000. That rises to about £30,000 during an auction. Mr Haynes said the cost for its users would be included in Aquis's mobile-phone tariff style flat subscription.

A successful start for the new venue would intensify pressure on incumbent exchanges, as technological and regulatory changes have fragmented share trading in Europe over the last decade. During the day, a significant portion of trading typically takes place at venues such as Bats Chi-X Europe, but that liquidity usually returns to an incumbent exchange for the five-minute auction at the close, as fund managers use it to ensure their trades correlate as closely as possible to the closing market price.

An auction is held after the market closes to settle outstanding orders and matching bids and offers are executed within a limited timeframe. Trades are not dependent on how fast an investor can trade.

Aquis is not only aiming to crack an untouched corner of the market but also add momentum to its fledgling business. It was founded by a group of former Chi-X executives a year ago with its subscription-based pricing model intended to shake-up the European share trading market. It has struggled to attract more than 1 per cent of the market as investors have been slow to connect to the venue.

Mr Haynes added the new order type would bypass new incoming European rules on trading blocks of shares, which are intended to push more trading back on to exchanges and away from banks.

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