CBOE CMC Closing Auction Approved by SEC
We have written several notes to you over the last 30 months about the CBOE Market Close, including notes dated October 18th 2017, January 22nd 2018, and January 26th 2018. CBOE’s plans to disrupt NYSE’s and Nasdaq’s monopoly over their closing auctions have traveled a long road indeed.
Closing auctions are one of the few areas where the NYSE and Nasdaq are still insulated from competition. At the close, stock trading – done on dozens of exchanges and dark pools throughout the regular trading day – reverts back to the primary exchange for the closing auction.
Back in May 2017 CBOE Bats BZX filed a proposed rule change to adopt a Bats Market Close closing auction process for non-BZX listed securities. Public comments ensued. The SEC twice extended the time period in which to approve or not approve the proposed rule change. In January 2018 – two years ago – the SEC approved the CBOE Market Close.
That was not the end of the discussion, of course. NYSE and Nasdaq appealed the SEC’s decision. They have been staunchly fighting to keep the monopoly over their closing auctions, in which they have:
- Steadily increased their portion of each day’s trading volume (doubled since 2010)
- Steadily increased their fees to access them.
In response to the NYSE and Nasdaq challenges, the SEC conducted a new review of the CBOE Bats proposal, spending all of 2019 on this review. Concluding that CBOE has met its burden to prove that its proposal was consistent with the Exchange Act, It just approved the proposed rule change.
CBOE Market Close Workings Recap
- Starting at 6:00am CBOE members can enter MOC orders up until 3:35pm.
- At 3:35 Buy and Sell MOC orders are matched based on time priority.
- Execution reports (without the price) are immediately sent to members.
- Unmatched shares are sent back to members.
- Total matched shares are published on the CBOE Auction Feed and the Multicast Pitch Feed.
- After 4:00 execution reports are resent to members, but including the price, and published to the SIP with a “P” sale condition code.
What is the CMC’s Rationale?
Cost. With closing auction volumes increasing (now over 7% of each day’s trading volume), as well as the Nasdaq and NYSE costs associated with the auctions, CBOE is providing an alternative that can lower explicit execution costs for investors.
Additionally, CMC’s design is such that it will not fragment and draw limit orders away from the primary market auctions. CMC will only accept MOC orders. CBOE notes that brokers are already offering guaranteed MOC executions off-exchange, printed to the TRF. In fact, broker off-exchange MOC trades make up 20-30% of the closing auction volume market share.
This is an experiment, and we cannot predict the outcome or CMC’s success. However, here are some questions and issues we think are important:
- NYSE’s base auction fee is 10 mils – less depending on the NYSE member tier. Nasdaq’s fees range between 8-16 mils, depending on the volume tier of the member. Those rates are less for high volume members (pricing tiers).
- What will CMC’s rate be?
- The CMC is a reference price – it references a future price that will be determined through a price discovery process on the primary exchanges. Will that future price discovery process be impeded with less volume in the primary exchanges’ auction processes?
- Currently brokers – mostly bulge banking firms – are already competing and siphoning off order flow that would have gone to Nasdaq and NYSE. Has the closing price-discovery process already been diminished by their activity?
- CBOE, NYSE and Nasdaq, are stock exchanges with very transparent processes and rules. They are also REG SCI entities. The brokers competing with the closing auction currently are not. One might argue that if Nasdaq and NYSE were going to have competition, it’s better that that competition comes from another transparent REG SCI exchange, rather than through an opaque broker dealer process.
- Many of you have in recent years shifted your trading strategies to focus more on liquidity in the last half hour of the day, where spreads tend to be narrower, and depth deeper. Will having closing auction volume further fragmented change the quality of your executions from strategies you more recently set in place?
- Will other exchanges jump on the bandwagon and institute a similar closing auction (think IEX). Will such additional competition also draw liquidity away from the primary auction, and potentially denigrate the price discovery process?
- Competition from brokers offering guaranteed Close execution has already given rise to potentially different reversion patterns. Will competition from new exchanges like CBOE, and potentially others, do the same? How does best execution fit into this?
We will follow up when we know when the CBOE’s CMC goes live. As always, please let us know your thoughts!