LONDON STOCK EXCHANGE REQUEST-FOR-QUOTE.

Scott Bradley, Head of Business Development,
London Stock Exchange and Turquoise

What is different about London Stock Exchange automated Request-for-quote?

London Stock Exchange’s auto-complete request-for-quote (RFQ) is a fully automated platform designed to fit within existing smart order routing protocol. The platform sits neatly inside electronic workflows allowing brokers to utilise existing connectivity already in place with London Stock Exchange thus requiring minimal additional workload to onboard to the service.

London Stock Exchange is committed to a culture of innovation, in partnership with customers. A great example of this innovation is our fully automated, centrally cleared RFQ platform which requires no manual intervention. The platform also enables efficiency and aggregation of liquidity provision as well as Best Execution.

Being an on-exchange platform, the mechanism provides central counterparty clearing. This is an important feature of the protocol because it removes the requirement for participants to maintain multiple bi-lateral relationships in an over-the-counter (OTC) environment. It also allows for the instrument universe to incorporate not only equities but depository receipts and exchange traded products which are currently cleared today. A key aim of MiFID II was to promote on-venue activity. Following that regulatory implementation and with other regulatory change expected in late 2020 in the form of Central Securities Depositories Regulation (CSDR), having a centrally cleared model offers increased levels of efficiency and provides potential settlement risk control to the broker community.

Easy access to the service and central counterparty clearing means this RFQ protocol is the ideal opportunity to search for liquidity. By operating on London Stock Exchange, the mechanism offers the broadest aggregation of liquidity counterparts in a trusted environment, on-exchange. Not all market participants are able to build out bi-lateral connectivity and manage associated compliance relations with a range of counterparts. As a result, new segments of the trading community can access the quality and diversity of the London Stock Exchange membership through the new auto-complete RFQ.

How does it work, what is the mechanism?

The auto-complete RFQ is a sell-side member-to-member trading platform. Control is afforded to the requestor in the form of either nominating whether to be in a named or unnamed workflow. Requestors can also take control over the duration of the RFQ session window and they have the ability to manage counterparty selection. This allows for requesting firms to create somewhat of a tailored experience that fits within their existing trading workflows. This is a model specifically designed for smart order routing decision logic that already sits within a broker’s electronic trading offering.

When a requestor enters an order in the RFQ mechanism, London Stock Exchange sits in the middle of the process and removes the side and the limit price of the request which effectively then becomes an automated request-for-market. Therefore, there should be comfort that the responding market makers and liquidity providers are encouraged to make their best price in the full size required (either one-way or two-way as there is no obligation to price quote). This is due to a “winner takes all” single counterparty fill construct. If suitable liquidity is provided on the platform, then a single fill (or a nothing done if not) is sent back to both the requestor and the winning liquidity provider at the same time, thus preventing unnecessary information asymmetry. Where a fill is achieved it passes as on-book, on-exchange through to central counterparty clearing and settlement.

With resource constraints often a concern, is the auto-complete RFQ simple to integrate?

As the specifications for the London Stock Exchange auto-complete RFQ fundamentally utilise the existing connectivity that member firms already have in place currently for their order book trading, it is an incredibly easy platform to integrate within existing electronic workflow. Being a direct member-to-member protocol, it affords the efficiency of bringing together one of the broadest ranges of liquidity provision, to participate and interact through the service. This provides a platform which becomes an ideal opportunity for brokers on behalf of their end clients to search for meaningful liquidity and a Best Execution outcome complete with supporting electronic audit trail.

We see the auto-complete RFQ as a liquidity proposition which can sit within the trading landscape. We see it in a position between the average fill sizes one might expect from interacting with Periodic Auction style constructs and the extraordinary liquidity often sourced from above large-in-scale Conditional block trading venues such as Turquoise Plato Block Discovery™. This means the nature of this RFQ complements the use of valued liquidity destinations whilst equally maintaining an environment designed for electronic smart order routing. In fact, minimum order submission size for auto-complete RFQ on London Stock Exchange is set at 25% of large-in-scale, maintaining an important distinction between existing central limit order book activity and the search for meaningful sized liquidity which works complementarily to existing automated channels.

All trades are conducted on-exchange under the rules of London Stock Exchange with RFQ activity being monitored by market surveillance. Where requestors choose to submit orders under the named model (where sell-side member transparency is provided during the RFQ session), an automated report highlighting counterparty interactions is provided which allows for brokers to conduct their own robust Best Execution analysis and for direct conversations and relationships to be maintained. Where an unnamed model is preferred then full anonymity is provided throughout the lifecycle of the trade. Under both the named and unnamed models, the identity of the underlying client remains anonymous.

Working closely with members, vendor platforms and directly educating the end investor community on the mechanics of the platform remain priorities for London Stock Exchange as adoption of the RFQ protocol for equities trading gathers momentum. Understanding the true positioning of this proposition within the smart routing landscape allows for it to be used most effectively in the search for liquidity.

www.lseg.com