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Freaky Friday T'day (18/03)


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Scheduled to take place between 10:10 & 10:15 (tho extensions can occur). Just a reminder for those who care.

Also S&P500 rebalancing occurs in the US. This time around they intend to accomodate the concept of "free float" in the re-weighting. This will for instance mean less Microsoft weight and more ExxonMobil. Th echanges will force trackers to sell and buy stocks to reflect changes. Could be volatile.


Details follow:


Apparently the halt in th emarket today was due to an intraday auction.

Okay, right, I've sorted this out. It seem sas though new rules are in place concerning the pricing of derivative contracts at expirations. I guess those of us who follow the markets intraday will be familiar with so called "freaky fridays" when multiple futures / options contracts expire. In the past this has led to large amount sof volatility around 10:00 to 10:30 on expiration days (for index potions an dfutures this is the third friday of the month, although futures occur only quarterly). presumably because of this, euronext/liffe have decided to change the system. Now, instead of keeping the market trading normally, it would appear they intend to introduce an intraday auction :

From the Stock exchange website :

3. Business changes

3.1 Background

Euronext.liffe’s current arrangement for calculating the final EDSP for the FTSE 100 Futures and Options contracts is an averaging process, whereby 81 readings of the Index are taken over a 20 minute period between 10:10 and 10:30 (London time) and averaged once the 12 highest and 12 lowest observations have been excluded*. An averaging process has been in place since the contracts were established in 1984, with modifications made over time to the number of index observations and exclusions.

Following consultation with market participants to determine possible ways of improving the Exchange’s trading arrangements that generate the prices for calculation of the final EDSP of Euronext.liffe’s FTSE 100 index and FTSE 250 index contracts, it is planned that an intraday auction process will be used from the 19 November 2004 expiry.

3.2 EDSP intraday auction model

The EDSP auction will be based on the same process as the closing auction process with the variation that there will be no volume check.

During the EDSP auction, participants can enter or delete limit, iceberg and market orders for SETS securities as well as committed principal orders for SETSmm securities.

FTSE International Limited (“FTSEâ€) will calculate and disseminate real time index values during the intraday auction period until such time that all the securities have uncrossed.

Upon completion of the EDSP auction FTSE will publish a flagged final EDSP, calculated using the uncrossing price for each of the securities in the index. In the case where a security has not produced an uncrossing price due to the security not having a crossed book, the latter of the last automated traded price prior to the EDSP auction or the previous day’s closing price will be used to calculate the final EDSP.

Expiries occur:

ï‚· On the third Friday of the month for the FTSE 100 Index Options.

ï‚· On the third Friday of every quarter (March, June, September and December) for the FTSE 100 and FTSE 250 Index Futures.

ï‚· Starting at 10:10am, with uncrossing scheduled to take place at 10.15 plus a random start time.


From the Stock Exchange Website ( http://www.londonstockexchange.com/en-gb/p.../techguidenote/ ):

"During the 10 minute period leading up to the EDSP auction (10:00 to 10:10), if a security breaches its price monitoring tolerance the security will move into an extended intraday auction call and will not return to continuous execution until after uncrossing is complete.

The EDSP auction is made up of 2 main periods plus an auction match ....

The initial call period will last for 5 minutes, from 10:10 to 10:15 and be subject to extensions and random start periods....

There are 8 possible scenarios for how the auction extensions can occur. This gives potential total auction duration of 19 minutes for SETS securities and 21 minutes for SETSmm securities meaning that the EDSP auction starting at 10:10am may not complete until 10:29am or 10:31am respectively ...

After the auction process ends the order book moves back into continuous trading.


So this process had only been in place during December and January. December is too freaky a month to notice anything odd in so that leaves us with one previous point of experiece : the third friday in january. The auction is clearly there in th eminute chart if you look (21st Jan, 10:10 to 10:15) but this passed unnoticed as the open and close of the auction period differed in price by only 0.1. This tim eth edifference was 100 times larger. No small wonder therefore that I was taken aback by this. Will post here if I learn anything else worth knowing.

(* it was this averaging process that previously led to volatility between 10:00 and 10:30 as market players sought to swing the market temporarily to make their options expire more profitably.)

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