In a bid to both bring equity market liquidity back to the lit exchanges and to its own venue, the Chicago Stock Exchange (CHX) has announced a new on demand auction system.
CHX told Traders it has plans to file proposed rules with the Securities and Exchange Commission which, subject to regulatory approval, will permit CHX to offer the only on-demand equities auction on a national securities exchange.
The on-demand auction mechanism, dubbed SNAP, is part of the bourse’s larger technology overhaul first reported here in Traders in January. The SNAP auction is expected to be fully operation and launched by the summer.
The goal of SNAP, like many exchange trading strategies, is to bring liquidity back to the public or lit exchanges and away from unlit or opaque dark pools. Many argue that the increasingly amount of liquidity being found in these dark pools and other off board venues harm investors by hampering public price discovery and best execution.
Enter SNAP.
“SNAP Auctions are designed to help level the playing field by largely neutralizing speed advantage, providing transparent rules governing a trading process which is fair to all, and seeking to minimize information leakage in a dark auction conducted in a normally lit market,” said CHX chief executive John Kerin. “We believe that SNAP Auctions bring to market the best aspects of an exchange’s price discovery mechanism, dark pool liquidity, and trade anonymity. SNAP Auctions can also mitigate problems associated with market fragmentation.”
CHX’s SNAP Auction rules define a Sub-second Non-Displayed Auction Process which introduces on-demand auctions to an exchange trading model – a first in the US securities industry.
According to CHX, this levels the playing field between those who submit orders early in the day and those who respond quickly after an auction begins. A SNAP Auction will take less than one second. SNAP Auctions will be available during the regular trading session. CHX announces the start of a SNAP Auction in a given security, but the side, size, and limit price of the SNAP Order which leads to the auction are never disclosed.
How does the SNAP Auction work?
Traders can participate in a SNAP Auction by initiating a SNAP Auction or by responding to a SNAP Auction. Any market participant can submit an undetectable, dormant SNAP Auction Only Order long before a SNAP Auction takes place. If a SNAP Auction occurs, CHX will automatically activate and algorithmically price SNAP Auction Only Orders as directed by the order sender. SNAP Auction Only Orders submitted prior to an auction have greater time priority over orders submitted in response to a SNAP Auction.
CHX will offer on-demand SNAP Auctions for any security traded on CHX other than when-issued or when-distributed products.
