TICK SIZES, PASSIVE EXECUTIONS AND THE INNOVATIVE ORDER TYPES FOR SWISS EQUITIES.
By Adam Matuszewski, Senior Equity Manager, SIX.
Harmonisation means lower
MiFID II tick size harmonisation brought a new calculation methodology for equity price steps. The tick size depends not only on the security price but also on the average daily number of trades. For Swiss Blue Chips traded on SIX Swiss Exchange, the new tick size regime meant lower tick sizes for the most traded symbols. In Blue Chips, half of the securities saw a tick decline by at least 50%.
We focus in on the most liquid Blue Chips where the liquidity impact is most prominent and which are also the most traded equities in Europe. Stocks such as Nestle (NESN), Novartis (NOVN) and Roche (ROG) previously traded with no vacant ticks between best bid and offer. Hence, improving the spread for these stocks was close to impossible. As a result, we saw a large accumulation of orders at the touch with average values of between CHF 0.5m – 1.5m at the bid and offer. With the tick size change on the 3rd of January, liquidity remained strong but few notable changes could be observed.
The average spread in those Blue Chips securities halved to approximately 3bps in 2018 and this was matched by liquidity at the bid/offer that today oscillates between CHF 0.2m and 0.3m. On average the most liquid names continue trading 60% of the time at ‘one tick’.
These changes directly impact passive trading. On one hand, we observe that the queues on top of the order books have shortened by 50%. This subsequently reduced time to fill on average by 17 seconds across Blue Chip securities. It is important to note that reductions in time to execution for orders placed passively in the book are the highest for NESN, NOVN and ROG. We observe that the passive participation rate of brokers and Investment Banks has increased in the early months of 2018 to 51%, from a mere 43% in 2017. This leads us to a conclusion that the tick changes implemented on SIX Swiss Exchange facilitated the ability of these firms to execute client business passively and added value to them doing so. On the other hand, ‘the time to tick’ which measures the average time it takes for a symbol to change its price, has fallen. This indicates that the market moves faster and in theory following the best prices became more difficult.
Peg and dual representation
SIX Swiss Exchange’s next technical release introduces native ‘near-touch’ price pegging functionality that allows clients to more efficiently follow the best bid and offer prices. This functionality ensures that an order follows the best market price every time the market moves. Pegging is offered in conjunction with another new order feature that allows ‘dual representation’ of orders in both the central limit order book (CLOB) and the non-displayed SwissAtMid pool (see directory p116). Through dual representation, members benefit from capturing liquidity sitting at the midpoint whilst also interacting with orders in the CLOB (see graphic).
Iceberg Plus and Limit Plus
Iceberg Plus and Limit Plus are the two order variations featuring pegging and dual representation. Limit Plus is a unique new order type that allows participants to place their resting orders into both books simultaneously, allowing full visibility in the lit order book, but also total availability for execution in SwissAtMid.
Iceberg Plus is the enhanced version of the standard iceberg order with the visible tranche pegged to the bid/offer while the full quantity is available to trade in SwissAtMid. In addition, randomisation of displayed peak is new functionality added to iceberg orders offered at SIX Swiss Exchange. This will help members to control how much of their order is visible to the market to maximise execution opportunity while minimising information leakage.