Simon McQuoid-Mason, Head of Equity Products at SIX Swiss Exchange.
Market conditions for trading venues have been challenging of late. While listing and trading volumes in asset classes such as bonds, ETFs and similar assets have increased, fewer people are trading stocks through traditional methods, such as on lit exchanges. This has been testing for both market operators and trading participants alike.
Although it has seldom been so essential for market participants to maximise their share of traded volume via innovating existing offerings, these market factors have made the delivery of new initiatives difficult to justify within development pipelines and budgets. Delivering effective innovation in such a complex and competitive space is not easy, after all. On the one hand, there is the risk of over-engineering and adding unnecessary complexity to market processes. On the other, there is temptation to engage in ‘panic innovation’, whereby firms develop a ‘me-too’ solution that usually only serves to fragment, rather than complement, existing liquidity.
Both scenarios result in new innovations being starved of liquidity, either due to slow adoption or a lack of perceived benefits for prospective users. If this is the case, developing the solution becomes merely another resource drain on already stretched development pipelines – sometimes unearthing additional complexities due to being poorly aligned with existing workflows.
No one is arguing that markets should stand still, though. Innovation remains essential to improving trading conditions. Rather, against this backdrop, a pragmatic approach to innovation is essential. Ensuring new solutions provide a net benefit to market participants – spanning both the buy and sell sides of the market – is crucial. So too is ensuring its technological design complements existing workflows and interfaces, rather than hinders them.
While pragmatic innovations may take firms longer to develop and bring to market, the potential rewards for market operators – and most importantly, market participants – are significant. This approach is integral to how SIX brings new trading tools to its clients. In the following article, we explore how SIX has taken a pragmatic attitude to innovation to create tangible benefits for market participants, rather than myriad problems.
SwissAtMid
Winding back the clock almost a decade, we observed significant demand from market participants to trade equities electronically and in larger size on non-displayed orderbooks. This was driven by a desire to avoid information unnecessarily leaking to the market, which can impact pricing for large orders.
However, when trading in the dark, market participants have a wide variety of needs. These range from seeking price improvement on high-urgency liquidity seeking orders, to sourcing natural liquidity in size to minimise market impact and maximise execution performance.
Taking these diverse requirements into consideration, SIX Swiss Exchange developed SwissAtMid in 2016. The service operates on the same atomic matching cycle as the company’s central limit order book (CLOB). It offers users zero-latency sweep order functionality, as well as the ability to specify a Minimum Execution Quantity (MEQ) to mediate the shape – and type – of liquidity users interact with.
Since then, we have further evolved how participants can interact with SwissAtMid by introducing plus orders, which allow improved liquidity capture on orders pegged to the near touch, without risk of overfill. Conditional orders – otherwise known as indicative block orders – have been developed to allow participants more flexibility in finding contra block liquidity at the midpoint without risk of overfill.
Each of these innovations were introduced as additional order-types or routing instructions. This approach helps ensure liquidity is not unnecessarily fragmented into discrete pools, while still allowing trading participants to customise their liquidity interactions. As of 2024, SwissAtMid is the largest non-displayed pool of liquidity for the trading of Swiss securities, generating HF 15.9m of price improvement over the last year alone.
Auction Volume Discovery
Another well analysed and publicised development in markets over recent years has been the marked swell in equity volumes traded during primary auctions across Europe. Data shows a quarter of trade volume in Europe is conducted in primary auctions.
Following advancements in how trading participants approach auctions to minimise price impact, and the growing variety of participation strategies, internalisation, and risk-managed closing products, there was an elevated risk of fragmented liquidity during primary auctions. The risk was that this fragmentation could result in less efficient liquidity sourcing during the opening or the closing auction. Careful thought around how an innovative solution might alleviate this challenge for market participants was essential in this context.
With this in mind, SIX Swiss Exchange developed the Auction Volume Discovery (AVD) order type. This permits trading participants to inject latent liquidity – which refers to liquidity held back from participating in the auction to mitigate price impact – into the auction, without shifting displayed volume or price.
As such, the Auction Volume Discovery order type helps stitch together participation-capped liquidity, held discretely across our universe of trading participants, while simultaneously ameliorating the risk of information leakage and the associated price impact.
ETF QOD Europe
Finally, amid surging demand for access to ETFs across Europe, the most recent SIX innovation, ETF QOD Europe, sought to expand the scope of ETF products available to investors. Ease of access was also a priority, with ETF products scattered across numerous locations. We subsequently ensured users could access ETF products in one location via QOD. These ETF products are also CCP cleared, offering direct settlement into the CSD defined on the primary listings market.
ETF QOD Europe leverages SIX Swiss Exchange’s on-exchange RFQ trading mechanism – Quote on Demand (QOD) – to deliver these advantages. This sits alongside its displayed orderbooks for ETFs and offers inbound orders to sweep across both mechanisms to find price improvement.
This set-up makes it easier for trading participants to seek liquidity within their existing electronic workflows, reconnecting fragmented liquidity channels, promoting post-trade fungibility and, ultimately, enhancing efficiency. In fact, as of 2024, over 95% of trades in QOD were executed at the European best bid offer (EBBO) or better, driving considerable liquidity gains and greater execution quality.
*Market Viewpoints comprise sponsored content and do not necessarily reflect the views of the editor.
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