RFQ viewpoint

Agency broker Instinet was the first to launch an RFQ platform in European cash equities with Blockmatch MTF in March 2018. Ben Stephens, head of EMEA business development at Instinet assesses their impact.

Has the buyside warmed to the need for RFQs for cash equities rather than seeing them as suitable only for illiquid asset classes?

The value of the RFQ model has started to make itself clear to buyside users; it offers a level of control over not only the order parameterisation and information footprint, but also for the engagement of counterparties. It serves as a powerful complement to other conditional order types when a trader is looking to execute larger blocks.

This means traders can manage exposure of their intentions in a way that is appropriate for the order. It also provides clients with an opportunity to find a match at a price other than a simple midpoint of the displayed quote. It can serve as an efficient means of price discovery for very large orders, where no quote is available.

Competition is growing and more platforms exist for RFQs for cash equities, what has this meant for your business?

The greater the usage of these new order types, the better for everyone. When we launched our equity RFQ offering, we knew that it would begin a trend and we welcome that level of competition. Competition is very good for the market overall. The critical thing is to offer our clients informed choices – it’s what liquidity aggregation is all about.

Why do RFQ platforms lend themselves well to the post MiFID II world?

One of the key objectives of MiFID II is to bring more trading onto centrally cleared venues. By adding ‘all to all’ RFQ functionality on BlockMatch’s CCP cleared platform, trading interactions that used to be primarily done over-the-counter can now be executed in our regulated venue. We believe this fits well within the spirit of MiFID II and MiFIR share trading obligations, while at the same time giving our clients and members opportunities to benefit from automating the management of their liquidity.

How can clients avail themselves of a variety of platforms to access liquidity, without increasing their risks of information leakage?

Our liquidity aggregation philosophy has been about leveraging Instinet’s broker neutral, agency status as a sort of clearinghouse of liquidity. Our buyside clients can choose to remain anonymous, or be attributed, based on their preference.

We can use our good relationships with Liquidity Providers and SIs to optimise trading opportunities for our clients as the liquidity landscape changes.

Our bilateral liquidity relationships with an array of SIs gives liquidity providers an ability to provide meaningful liquidity to a wider set of counterparties across Europe. This gives a liquidity provider wider “distribution”, if you will, which gives them more innovative ways to reach and benefit end investors.

And by managing our clients’ interaction with many sources of liquidity in an anonymous manner, we can essentially personalise their access to the right counterparties in the most efficient way possible. It’s a win/win – this is good for Instinet’s clients and good for liquidity providers, alike.

What influences will continue to shape the market in the future?

We’ve seen several trends:

• Complexity of rules, and the number and diversity of trading venues has continued to grow. It’s the sellside’s role to smooth this out for their clients, in our view.
• Sources of order flow have shifted away from bulge brackets toward electronic market makers, which have different revenue models. This requires a new set of tools and new ways of interacting with counterparties.
• Execution consulting – i.e., insight that is closer to the live execution time horizon – that is actually part of the trader’s workflow – will really begin to differentiate broker offerings. Clients need to be able to apply the intelligence that big data analytics are making possible in real time.
• Conditional order types will become more ubiquitous – clients need this level of nimbleness and discretion in their automated strategies. The reliance on simple, schedule-based, single-strategy algos is becoming a thing of the past.
• The wider adoption of more complex workflow automation, augmented by machine learning, will happen more quickly than many people currently believe. These capabilities will not make human traders obsolete, but rather, will allow the trader to give these automated solutions increasingly sophisticated tasks, and enable them to take better advantage of the benefits of big data, speed and scale.
• We will see an evolution of the technologies used by the most advanced firms, including platforms such as FPGA, microwave and multi-colocation to gain a technology based trading advantage in a world where efficient information processing, and smart adaptation, is key.