MiFID II Catalyses RFQ For Cash Equities

Shanny Basar

New regulations in the European Union have boosted block trading in the region and led to the extension of the request-for-quote order protocol, from exchange-traded funds and less liquid asset classes, into cash equities.

Nej D’jelal, Plato Partnership

Nej D’jelal, co-chairman Plato Partnership and head of electronic equities product at Barclays, told Markets Media: “As part of Plato Partnership’s purpose to simplify market structure and reduce industry costs, we recognised the opportunity for an industry utility to play a role in the potential evolution of cash equity RFQs.”

Plato Partnership is the not-for-profit industry group representing asset managers and broker dealers which aims to improve market structure and achieve better results for end-investors. RFQs have traditionally been used in less liquid asset classes, such as fixed income, where the buyside has to send an RFQ for prices to a number of dealers.

However, the equity trading landscape in the European Union has changed since MiFID II went live at the start of this year. The regulations aim to encourage trading on lit venues by introducing double volume caps on trading in dark pools. This has led to a boost in volumes of block trades and periodic auctions as there are waivers for large-in-scale (LIS) orders and trading in auctions.

Broker crossing networks have also been banned so firms have to set up systematic internalisers in order to provide risk capital that facilitates trades. As a result market participants now need to monitor and interact with a complex array of trading venues – lit, dark, conditional and SIs – in addition to their traditional sources of liquidity to achieve best execution.

Last month Plato and Tradeweb Markets, which provides electronic trading for fixed income, derivatives and ETFs, announced a strategic partnership to deliver Tradeweb Plato ‘eBlock’. The first phase is scheduled to go live in the third quarter of this year and will include the introduction of RFQs to enable targeting of broker principal risk liquidity on a regulated venue, Tradeweb’s multilateral trading facility.

D’jelal continued that whilst the automated RFQ model is proven in the ETF market, it is still at an early stage for cash equities and so requires an appetite for innovation and experimentation. “This mechanism is appealing to some participants as it may assist best execution for some names and sizes where appropriate,” he added.

Plato Partnership invited a number of firms to pitch to provide the new service. “As part of the selection process Tradeweb satisfied a number of key requirements including proven nimble technology delivery and buyside workflow expertise,” said D’jelal.

Tradeweb launched electronic RFQs in fixed income and has extended the protocol into other classes, including European ETFs, but the firm has not previously been active in cash equities.

Adriano Pace, Tradeweb

Adriano Pace, managing director, equity derivatives at Tradeweb, told Markets Media: “Tradeweb has already entered elements of the equities market. Back in 2010, the platform was focused on fixed income, but we have since added products priced on equity floors such as equity derivatives, ETFs and convertible bonds.”

He continued that Tradeweb has thought about expanding into cash equities for a while, but needed a catalyst.

“First, we knew MiFID II would boost electronic execution for larger trades,” he added. “Then Plato Partnership, which represents both banks and the buyside, approached us in 2017 to explore how to support demand for risk-trading.”

Electronic RFQs also make it easier for the buyside to meet the stronger MiFID II best execution requirements, as they provide an electronic audit trail of all quotes and help evidence why the winner was selected.

Mike Bellaro, Plato Partnership co-chair, said in a statement: “eBlock allows buyside traders to tie the sourcing of risk liquidity into the execution process using intelligent data analytics, giving them the necessary information required to make good decisions about trade execution.”

Pace continued that Tradeweb plans to introduce its own version of “blotter scraping” technology to collect orders and identify possible matching opportunities. “The quality of execution will be paramount, and our partnership with Plato is important in guiding the buyside to efficiently find the other side of a trade,” he added.

Tradeweb also plans to  provide investors with an aggregated view of dealers’ principal risk positions in a stock, and relevant data on their behaviour. “Any successful platform must be able to show past trading behaviour and Tradeweb fully discloses trade counterparties, which is very important,” said Pace.

Tim Cave, analyst on European market structure at consultancy Tabb Group, said in a blog that agency broker Instinet was the first to launch an RFQ model in European cash equities with Blockmatch MTF, and that the London Stock Exchange will soon follow.

Ben Stephens, Instinet

Ben Stephens, head of EMEA business development at Instinet, told Markets Media last month that central limit order books are the most efficient for liquid markets where information is disseminated to everyone instantly but RFQs work well for less liquid securities. For example, he noted there are 28,000 equities in Europe but only 1,500 to 2,000 are liquid, and only 200 ETFs are liquid.

“Adding RFQ to BlockMatch enables clients to trade equities and ETFs in larger size, where capital can be put at risk, without having to register as an SI and also allows buyside-to-buyside trading,” added Stephens.

Cave continued that Tradeweb Plato eBlock shows that the RFQ model has “truly arrived” in European equities but time will tell if the model takes off.

“Plato has a blue-chip list of buyside and sellside backers,” added Cave. “Tradeweb, for its part, brings not only its significant expertise in the RFQ model to the table, but its major presence on European buyside desktops by virtue of its ETF platform.”

He noted that the RFQ model is one of five pre-trade transparent, or lit, trading systems under MiFID II, and so is exempt from the dark pool caps. As a result of MiFID II conducting larger, voice-executed trades,  around 15% of Europe’s equity volume, is far more challenging.

“This appears to be where eBlock is aiming to insert itself – creating a centralised platform for indications of interest between dealers and the buyside,” said Cave. “These trades are likely to be around or just below the large-in-scale thresholds. By contrast, the Instinet RFQ platform is marketing itself as a fully automated, all-to-all type platform and has attracted smaller-sized trades to date.”

Pace said: “Tradeweb is a significant player in ETFs, derivatives and fixed income. In equities there are already established exchanges and successful dark pools, but we expect to capture part of the market that is suited to RFQs.”

When Plato Partnership announced its formal creation in 2016, is also also announced its first partnership by entering into an agreement with Turquoise, the London Stock Exchange Group’s pan-European MTF – the first between the buyside, sellside and a trading venue.

D’jelal said: “eBlock complements the Turquoise Plato offering which provides electronic block solutions for algorithms.”

Turquoise rebranded its dark services as Turquoise Plato Block Discovery and Turquoise Plato Uncross. Uncross features random intra-day auctions which happen more frequently in more liquid stocks, making it harder for the auction to be targeted by aggressive trading strategies. Block Discovery facilitates trading in larger block orders by electronically matching block indications. On identifying potential matches, the service requires participants to send firm qualifying block orders to Uncross and their behaviour is monitored.

Last month Turquoise said:

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