Goldman Leads in Setting Up Periodic Auction Service

Goldman Sachs Group Inc is taking on the exchanges to win the business of fund managers eager to keep their stock trades hidden in the era of MiFID II price transparency.

The bank has set up a so-called periodic auction service that matched its first trades on March 21, allowing investors to buy and sell shares without tipping their hand to the rest of the market, Bloomberg reported.

Exchanges began offering the service earlier. Europe’s largest dark pool, run by Chicago Board Options Exchange Global Markets Inc, is now doing more business through periodic auctions than it is through its dark markets.

“The launch represents the first bank-led periodic auction book,” David Shrimpton, a managing director at Goldman Sachs, said. “The product will enable our clients to trade in a fair, multilateral and transparent environment.”

Periodic auctions are increasingly seen as a way of sidestepping MiFID II’s curbs on dark trading. UBS Group AG will follow Goldman Sachs with its own service later this month, a spokeswoman said. Both firms are reacting to demand from their biggest customers. Fund managers need to complete their trades without moving share prices against themselves.

The auctions are coming to the fore because 755 European stocks are already banned from trading in dark pools, which hide orders until they have been matched. More names are likely to join that list when the European Union’s markets regulator updates it after the close of trading on Monday.

“Periodic auction volumes will continue to increase,” said Mark Hemsley, chief executive officer of Cboe’s European arm. “The flipside is that our competitors are trying to get their own offerings out.”

Cboe’s rivals Investment Technology Group Inc and Turquoise, a business run by London Stock Exchange Group Plc, have yet to disclose the volumes on their competing services.

The EU introduced caps on dark pools because they decided—under intense lobbying from stock exchanges—that dark trading reduced the efficiency of stock markets as a whole.

Fund managers, however, still need ways of trading that keep all the best bits of dark pools, so trading venues and banks alike have reacted by coming up with new ways to trade. Rather than driving trading volumes to the stock exchanges, MiFID II may have forced the exchanges’ rivals to become more innovative.