London Stock Exchange proposes third auction at noon to keep investors from dark pools

In a proposal aimed at radically shaking-up the trading day, the London Stock Exchange has proposed a third auction at noon in a bid to attract investors away from "dark pools", The Telegraph newspaper reported.

Dark pools are alternative and opaque trading venues that have been gaining popularity as they allow investors to trade throughout the day without disclosing them to the wider market until the trades are completed.

These private exchanges, run by big banks, had become popular with bigger market players in recent years to avoid the high-frequency traders.

The Independent reported that institutional investors such as pension funds had taken advantage of these opaque pricing periods to sell large blocks of shares without letting the wider market know of their intentions and allowing the high-frequency traders (HFTs), exposed by author Michael Lewis's book Flash Boys, to move prices against them.

The introduction of the intra-day auction was in direct response to demand from buy-side participants for neutral, infrastructure-led solutions for trading in large blocks, he added.

The auction would allow participants to place orders in a truly confidential, yet price-forming environment via a well-understood mechanism, he said.

Accordingly, from late next year the exchange would introduce a two-minute auction at mid-day, when trading in UK equities would be put on a pause.

The LSE already conducts two auctions, at the start and end of each trading session, which help institutional investors deal in large amounts of stock.

During an auction, information as to the identity of investors and the amount of stock ordered is kept from high-frequency traders, ensuring the market did not move against investors during trades.

The move was first proposed in March and was being introduced ahead of a crack-down on dark pools.

According to Brian Schwieger, head of equities at the London bourse, among the oldest in the world tracing its origins back to the 17th century, this was a very significant change to the trading day, following a detailed consultation with market participants.