Strategic comparison of Euronext and London Stock Exchange order books

Transcription

1 Strategic comparison of Euronext and London Stock Exchange order books IEM Finance Didier Davydoff Grégoire Naacke March 25

2 A comparison of detailed order book and transaction data: Executive summary Our goal: Study the intra-day dynamics of the London Stock Exchange and Euronext Sample: 5 pairs of similar stocks at the LSE and on Euronext. Order book (SETS and NSC) and transactions data Main Findings: For similar stocks, more trades on Euronext than at the LSE. More orders stored in the order book at best limit at the LSE than on Euronext, at any time of the trading session. Tick sizes bigger at the LSE than on Euronext translates into broader quoted spreads. Order books of most liquid stocks are deeper on Euronext than at the LSE: cumulated value of orders is bigger and the range of prices is narrower

3 The sample Our research is based on a comparison of a selection of 5 pairs of stocks showing similarities in terms of both economic sector and free float market capitalisation. Transaction data: Trades on Euronext and the LSE (June 21-25, 24) Order book data: Five best limits on Euronext and the LSE (September 6-1, 24). Sample: 1 securities (Stoxx data close for Dec 31, 24) Euronext London Stock Exchange Supersector Free Float Float Supersector Free Float Float Mket Cap. Mket Cap. Millions EUR Millions EUR Royal Dutch Petroleum Oil & Gas % Shell Transport & Trading Oil & Gas ABN Amro Banks % Lloys TSB Group Banks Carrefour Retail % TESCO Retail Heineken Food & Beverage % Allied Domecq Food & Beverage Air France Travel & Leisure % British Airways Travel & Leisure

4 Strategic comparison of Euronext and LSE order books: Table of contents 1. Auctions and continuous market 2. Hourly breakdown of orders and trades 3. Spreads 4. Depth of the order book 5. Trades executed in the order book versus trades executed outside at the London Stock Exchange

5 Auctions and continuous market : Trading Hours (local hours) - Liquid stocks The trading phases are the same on both exchanges: pre-opening opening auction, continuous session, closing auction. Pre-opening is much longer on Euronext than at the LSE. London Stock Exchange Euronext 7h5-8h: Opening auction call 7h15-9h: Opening auction call 8h: Opening Auction match 9h: Opening Auction match 8h-16h3: Continuous trading 9h-17h25: Continuous trading 16h2-16h3: VWAP 17h25: Start of closing auction call 16h3-16h35: Closing auction call 17h25-17h3: Closing auction call 16h35-17h: Order maintenance 17h3-17h4: trading at last

6 Auctions and continuous market : More trades in Paris than at the LSE The number of trades for similar stocks is higher on Euronext Paris than at the LSE. It is partly explained by internalisation of the retail order flow in London. There are very few opening auction trades at the LSE (.21% on a sample of nine equities, week june 24), whereas their number is more significant on Euronext (2.52% on CAC4 equities, week june 24) The closing auction represents a small percentage of the number of trades o both exchanges. Breakdown of the number of electronic trades in Paris and London (june 21-25, 25) Number of Trades LSE - British Airways 91.2% EN - Air France 97.1% Number of Trades LSE - TESCO EN - Carrefour 95.1% % %.7% 2.85% 1.99% % 2.16% 3.9% 2.72%

7 Auctions and continuous market : Also more trades in Amsterdam than at the LSE The total number of trades for similar stocks tends to be higher in Amsterdam than in London. However, the share of the opening auction in Amsterdam is almost as low as in London. Breakdown of the number of electronic trades in Amsterdam and London (june 21-25, 25) Number of Trades LSE - Allied Domecq 96.8% EN - Heineken 97.2% Number of Trades LSE - Lloyds EN - ABN Amro 97.6% 96.4% Number of Trades LSE - Shell T&T EN - RD Petroleum 96.9% 96.9% %.69% 2.8% 2.54% % 1.31% 2.97% 2.29% 5.29% 1.38% 2.81% 1.71%

8 Auctions and continuous market : Closing Auction mainly used by institutions The share of the closing auction is higher in value than in number of trades on both exchanges: closing auction is a service mainly used by institutions in Paris and London. Breakdown of the value of electronic trades in Paris and London (June 21-25, 24 in and %) K 93.6% LSE - British Airways EN - Air France 6 5 LSE - TESCO EN - Carrefour 95.4% % % % 5.23% 6.39% 8.71% 1.34% 1.69% 6.99% 2.88%

9 Auctions and continuous market : Closing Auction mainly used by institutions As in Paris, the share of the closing auction in Amsterdam tends to be higher in value than in number of trades. Breakdown of the value of electronic trades in Amsterdam and London (June 21-25, 24 in and %) K LSE - Allied Domecq EN - Heineken.1%.27% 92.9% 95.3% 7.6% 4.4% LSE - Lloyds EN - ABN Amro.47%.79% 92.3% 91.3% 7.25% 7.87% LSE - Shell EN - RD Petroleum.48% 1.74% 92.9% 94.4% 6.65% 3.88%

10 Auctions and continuous market : Average value of trades generally higher in London Except for Shell Continuous Trading (Royal Dutch/Shell), average value of trades are higher in London than on Euronext. The average value of trades which reflects the degree of institutionalisation of a market is a key determinant of the share of opening auction, whatever the market. For instance, more retail orders for Air France than for Carrefour translates into a higher share of the opening auction for the former.

11 Auctions and continuous market : Average value of trades generally higher in London Average value of electronic trades on Euronext and the London Stock Exchange (June 21-25, 24) 12 1 LSE - British Airways EN - Air France 12 1 LSE - TESCO EN - Carrefour LSE - Allied Domecq EN - Heineken 12 1 LSE - Lloyds EN - ABN Amro 12 1 LSE - Shell T&T EN - RD Petroleum

12 Hourly breakdown of orders and trades: Number of Trades U-Shaped on both exchanges The hourly breakdown of the number of trades during the continuous trading session is generally U-shaped on both exchanges. The opening of the US market contributes to trading activity from 3 pm, but not dramatically. This result is consistent with theoretical predictions of market microstructure litterature. Trading at the beginning and at the end of the trading session stems from the inability to trade when the market is closed. Informed traders, knowing that there is forthcoming public signal, trade more aggressively at the begining of the day. However, the first trading hour is as much or less active than the second one in several cases (British Airways, Air France, Tesco, Allied Domecq, Heineken, Lloyds).

13 Hourly breakdown of orders and trades: Number of Trades U-Shaped on both exchanges Hourly breakdown of the number of trades (Continuous trading - June 21-25, 24) Number of trades LSE - British Airways EN - Air France Number of trades Number of trades LSE - Allied Domecq EN - Heineken LSE - Lloyds EN - ABN Amro Number of trades LSE - TESCO EN - Carrefour Number of trades LSE - Shell T&T EN - RD Petroleum

14 Hourly breakdown of orders and trades: Value of trades : Exceptions to the U-Shaped profile The hourly breakdown of trading in value is generally U-shaped too on both exchanges but there are more exceptions than regarding the number of trades. Some very big trades might influence the average figure relating to a relatively short period of time (for Carrefour, on June 23, two very big trades, each one relating to more than 2.. shares, have been executed at 15.4).

15 Hourly breakdown of orders and trades: Value of trades : Exceptions to the U-Shaped profile Hourly breakdown of the value of trades (Continuous trading - June 21-25, 24 ) LSE - British Airways EN - Air France LSE - Lloyds EN - ABN Amro LSE - Allied Domecq EN - Heineken LSE - TESCO EN - Carrefour LSE - Shell T&T EN - RD Petroleum

16 Hourly breakdown of orders and trades: More orders stored at the best limit at the LSE Except in the case of Lloyds/ABN Amro, there are more orders stored in the order book at the best limit at the LSE than on Euronext at any time of the trading session. Hourly breakdown of the average number of orders at the best limit (Continuous trading period - Sept. 6-1, 24) Number of orders 5 LSE - British Airways EN - Air France Number of orders LSE - Lloyds EN - ABN Amro h h3 Number of orders Number of orders 4 6 LSE - Allied D EN - Heineken LSE - Shell EN - RD Petroleum h h3

17 Hourly breakdown of orders and trades: Cumulative value of orders at the best limit higher at the LSE The cumulated value of orders stored in the order book at the best limit is generally higher at the LSE than on Euronext at any time of the trading session. Hourly breakdown of the cumulated value of orders at the best limit (Continuous trading period - Sept. 6-1, 24 ) LSE - British Airways EN - Air France h LSE - Lloyds EN - ABN Amro h LSE - Allied D EN - Heineken h LSE - Shell EN - RD Petroleum h3

18 Spreads: Spreads cannot be inferior to Tick Sizes For similar stocks, Tick Sizes are generally higher at the London Stock Exchange than on Euronext. London Stock Exchange Euronext Shell Transport & Trading.6% Royal Dutch Petroleum.2% Lloys TSB Group.6% ABN Amro.6% TESCO.9% Carrefour.2% Allied Domecq.5% Heineken.4% British Airways.9% Air France.8%

19 Spreads: Broader quoted spreads at the LSE Except in the case of British Airways/Air France, quoted spreads are broader at the LSE than on Euronext at any time of the trading session. On both exchanges, bigger free float market capitalisation are associated with narrower spreads. Except in the case of Air France, quoted spreads tend to be not much broader than tick sizes: the latter are a major factor of trading costs.

20 Spreads: Broader quoted spreads at the LSE Hourly breakdown of the average quoted spread at the best limit (Continuous trading period - Sept. 6-1, 24) LSE - Tick Size EN -Tick Size.7%.6%.5%.4%.3%.2%.1%.% LSE - British Airways EN - Air France LSE Ti k Si.35%.3%.25%.2%.15%.1%.5%.% LSE - Allied Domecq EN - Heineken LSE Ti k Si h h3.16%.14%.12%.1%.8%.6%.4%.2%.% LSE - Lloyds EN - ABN Amro LSE Ti k Si.12%.1%.8%.6%.4%.2%.% LSE - Shell T&T EN - RD Petroleum LSE Ti k Si h h3

21 Depth of the Order Book: Deeper order book on Euronext for most liquid stocks Order books of most liquid stocks are deeper on Euronext than at the LSE: cumulated value of orders is bigger and the range of prices is narrower. Market depth still remains within own accounts of intermediaries in London. Diagnosis is less clear for smaller free float market caps: the range of prices is always equal or inferior on Euronext, but the cumulated value of orders stored in the order book tends to be higher in London.

22 Depth of the Order Book: Deeper order book on Euronext for most liquid stocks Price and cumulated value of orders stored in the order book at the five best limits (Continuous trading session- Sept. 6-1, 24) 6 6 LSE - British Airways LSE - Allied Domecq 5 EN - Air France 5 EN - Heineken % -.5%.%.5% 1.% LSE - Lloyds TSB Group 1 4 EN - ABN Amro % -.2%.%.2%.4% % -.6% -.4% -.2%.%.2%.4%.6%.8% 1 8 LSE - Shell T&T 1 6 EN - Royal Dutch Petroleum % -.3% -.2% -.1%.%.1%.2%.3%.4%

23 Trades executed in the order book and outside: Euronext s order book still more active than the LSE s one In London, the electronic order book concentrates more and more trades. But Euronext s order book is still more active than the LSE s one. This is even clearer when the relative size of exchanges is taken into account. In October 24, the number of trades matched on SETS order book was the same as in Paris on NSC order book. Monthly number of trades in the Electronic Order Book janv-99 avr-99 Millions of Trades Euronext London Stock Exchange juil-99 oct-99 janv- avr- juil- oct- janv-1 avr-1 juil-1 oct-1 janv-2 avr-2 juil-2 oct-2 janv-3 avr-3 juil-3 oct-3 janv-4 avr-4 juil-4 oct-4

24 Trades executed in the order book and outside: Share of electronic order book increases at the LSE A sharp increase of electronic order book trades in London from 2 to the end of 22 But more than 2% of trades are still executed outside the order book and this figure is stable since the beginning of 23 Share of electronic order book trades at the London Stock Exchange 9% 8% 7% 6% 5% 4% 3% 2% 1% % janv.-99 juil.-99 janv.- juil.- janv.-1 juil.-1 janv.-2 juil.-2 janv.-3 juil.-3 janv.-4 juil.-4

25 Trades executed in the order book and outside: Much more trades executed in the order book in London Trades executed at the LSE during continuous trading session (Number of trades on ten minutes periods - British Airways June 21, 24) Number of trades Trades executed in the order book (excluding auction trades) Trades executed outside the order book 8: 8:4 9:2 1: 1:4 11:2 12: 12:4 13:2 14: 14:4 15:2 16:

26 Trades executed in the order book and outside: Bigger trades executed outside the order book At the LSE, trades executed outside the order book are much bigger than order book trades. Among all the trades executed outside the order book on the five stocks from June 21 to 25, only one block trade has been reported (on Shell T&T relating to more than 9, June 24) Trades executed at the LSE during continuous trading period (cumulated value of trades during ten minutes periods - British Airways June 21, 24) Trades executed in the order book (excluding auction trades) Trades executed outside the order book 8: 8:4 9:2 1: 1:4 11:2 12: 12:4 13:2 14: 14:4 15:2 16:

27 Conclusions The opening auction is more active in Paris than in London and Amsterdam. On both exchanges, Euronext and the LSE, the closing auction is mainly used by institutions. Intra-day trading volume is U-shaped. Tick Sizes are the major factor determining quoted spreads and the range of limits in the order book. The depth of the order book is bigger on Euronext for most liquid stocks. At the LSE, 8% of the trades are executed in the order book.