Volume and Liquidity in the UK Trading Day

The closing auction now consistently represents well over 20% of the daily volume in Europe. To emphasise the shift, around 35% of volume trades in the last hour and that increases to around 50% in the last two and a half hours.

Chart 1: Typical Volume Distribution on LSE

The difference in spreads, volatility, and market liquidity in the AM session vs. the PM session result in material differences to the cost of trading.

For a small 1% Average Daily Volume (ADV) trade on the FTSE 100 Index it would cost 4.4bps to execute the trade in the last 30 minutes of the day (excluding the closing auction), whereas the same trade in the first 30 minutes of the day would cost nearly three times more at 11.4bp

Traders in the London market indeed tell us that the first hour is the most expensive time of day to trade. They consider that this is caused by the wider spreads and lack of liquidity. This cost differential further perpetuates the migration of liquidity to later in the day and a degradation in morning liquidity.

For comparison, in the US market, which is shorter in duration by 2 hours and turns over approximately 6X the volume of the European markets combined, there is still a cheaper cost of trading in the afternoon where liquidity is higher and spreads/volatility lower, but the differential in cost to the morning session is much smaller. This demonstrates greater stability in liquidity conditions over the day in the US market

Chart 2: Estimated Cost of Trading 1% ADV in the London Market 

(First 30 min vs Last 30 min)

SETS Trading Day

Stock Exchange Electronic Trading Service (SETS) is London Stock Exchange’s flagship electronic order book, trading FTSE 100, FTSE 250, FTSE Small Cap Index constituents, Exchange Traded Funds (ETFs) and Exchange Traded Products (ETPs), plus other liquid AIM, Irish and London Standard-listed securities. London Stock Exchange also operates a version of SETS on a modified trading cycle that supports securitised derivatives. In totoal there are around 1000 securities traded on SETS (download list here)

SETSqx Trading Auctions

SETSqx is a quote-driven trading service which facilitates trading for AIM securities and some of the smallest Main Market securities. In total there are around 750 securities traded on SETSqx (download a full list)

The service displays the bids and offers of market makers, combined with the provision of multilateral order book auctions five times a day (at 08:00, 09:00, 11:00, 14:00, and 16:30).

SETSqx auction trading data (January 2019 - September 2019 inclusive) shows that almost 57.7% of trading activity on the service occurs during the closing auction. The remainder of the activity is spread across the four earlier auctions, with trading activity generally increasing as the day progresses.