The upcoming change in the TMX closing auction mechanism will mean smoother execution of inter-listed securities and will potentially make it more attractive for listings, according to Carrie Freeborough, SVP, Head of Trading at Mackenzie Investments.
“The new facility aligns to how the largest U.S. marketplaces operate their closing facilities. In this way, it makes Canadian equity markets far more competitive in a global marketplace,” she told Traders Magazine.
TSX (Toronto Stock Exchange) closing auction mechanism will be changing on October 18, 2021.
Toronto Stock Exchange will be disseminating the imbalance between buys and sells every 10 seconds starting from 3:50pm, versus only one dissemination of imbalance at 3:40pm.
“The new MOC will align Toronto Stock Exchange (TSX) with global standards,” said Rizwan Awan, President, Equities Trading and Head of TMX Markets, Products & Services.
Introduced in 2004, TMX’s Market On Close (TSX MOC) facility plays a vital role in Canada’s equities markets and broader financial services industry: setting the official closing price for eligible Toronto Stock Exchange (TSX) and select TSX Venture Exchange (TSXV) listed issues.
Freeborough said that the current market-on-close mechanism, which has been in place for more than 20 years, is dated and in need of revamping – market structure, both in Canada and around the world, has evolved substantially.
In 2019, based on industry feedback, TMX’s equity markets team embarked on a large-scale consultation process to explore ways to improve the TSX MOC facility.
There was extensive multi-year consultation with all Bay Street stakeholders to ensure that the new facility could meet the needs of buy-side, sell-side, passive and ETF players, Freeborough added.
According to Tethys Technology’s research comment, one of the primary goals of the TSX closing auction modernization has been to design a mechanism that enhances transparency, reduces auction price volatility, and as a consequence encourages further participation from investors in the closing auction.
The new TSX MOC model introduces three high level changes, each designed to address the issues of transparency, alignment with global markets, and consistency of execution.
Nitin Gambhir, Head of Quantitative Research, Tethys Technology, said: “The change gives much more flexibility to auction participants. With the richer set of information in the imbalance feed, updates every ten seconds and the ability to submit auction orders later, investors will be able to participate in the auction freely until the freeze period (between 3:56pm and 3:57pm) and stabilize the price if they see a significant imbalance or a price movement.”
“We expect a marked improvement over time in closing auction liquidity in less liquid securities and also an increase in auction eligible securities, allowed by the TSX. The TSX is an outlier globally, in that it maintains a narrow list of auction-eligible securities,” he said.
Gambhir added that it’s a step in the right direction: “These improvements to the closing auction process will make Canadian markets more competitive. Many Canadian stocks actively trade interlisted in the US, and these changes being implemented by the TSX will prevent auction volume from migrating to the U.S. exchanges that offer more efficient closing auctions.”
Freeborough added that the new mechanism is far more transparent which, as a buy-side institution, is exactly what they want.
“With this increase in transparency, we expect there to be an increase in liquidity and an increase in our ability to access that liquidity. Trading in 2021 is all about sourcing liquidity so this is a huge benefit, in my opinion. In addition, I think there will be more effective price discovery which clearly benefits everyone involved,” she said.
Awan expects a smooth transition to the new facility as it was designed in consultation with the street to minimize any workflow adjustments.
“We purposely built the facility in a way that it is backwards compatible. However, I’d be disappointed if nobody took advantage of the new features,” he added.
Meanwhile, Freeborough said there will likely be an adjustment period. There is no staged implementation for this roll out, so come October 18, all traders – both buy-side and sell-side – will need to adjust to the changes, particularly in how they trade over the last 20 minutes of the trading day.
It will take some time for different players to understand and utilize properly, she said.
“I expect, longer term, it will increase Mackenzie’s participation in the close but we are taking a wait-and-see approach in order to understand how it works in practice, where the advantages will be for our style of trading and what the unintended consequences look like,” she added.
Imbalances cause excess trading cost, according to Gambhir. One of the most important aspect of participating in exchange auctions is estimating the size of the actual auction itself and the likely impact on the imbalance from submitting an order. With a more accurate prediction (facilitated by the new frequency of imbalance data provided by the TSX), an investor can decide the optimal number of shares to submit to the auction.
“We also hope that the TSX will undertake a Phase 2 to improve the closing auction further,” he said.
Awan added that one of the big things that TSX is doing is promoting transparency in its model and making it look and feel to international investors, similar to the U.S. markets.
“What that means is that we will publish additional fields that give the participants greater clarity in terms of what the state of the imbalance looks like at any given moment in time,” he said.
“We will be carefully monitoring the market quality going forward to make sure that the facility is having the desired impact. We want to make sure we promote it to a broader audience to bring in those additional liquidity participants,” he said.
