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MiFID II Catalyses RFQ For Cash Equities

Traders Magazine Online News, June 12, 2018

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, 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, 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.

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