A DV E RTOR IAL
RFQ for equities: Arming the buy-side
with choice and ease of execution
As a fully MiFID II compliant trading protocol, RFQ introduces another element of
choice and control to the way buy-side firms can access liquidity in cash equities
on-venue, says Adriano Pace, head of equities (Europe) at Tradeweb.
O
ne year on from the introduction of
MiFID II, buy-side equity trading
desks are not only confronted with rising
volumes, costs and compliance pressures,
they are also facing challenges in accessing
liquidity within an increasingly fragment-
ed landscape. These challenges have led
to a demand for innovative approaches to
execution in the European equity markets,
including the launch of request-for-quote
(RFQ) platforms for institutional investors.
Tried and tested for many years across
different asset classes for both liquid and
illiquid instruments, the RFQ protocol
is being introduced in cash equities to
enable institutional investors to refine and
improve their execution performance by
selecting multiple sell-side brokers to price
orders efficiently, whilst equally minimis-
ing the potential market impact.
Compliant liquidity access
As liquidity has become more fragment-
ed, trading medium to large sizes on lit
exchanges can be challenging. Buy-side
firms are therefore more open than ever
before to alternative methods of transacting
and interacting with their preferred sell-
side brokers, so long as that allows them to
optimise their ability to transact.
The electronic multi-dealer RFQ
mechanism provides a robust and tested
mechanism for the provision of commit-
ted liquidity, allowing buy-side firms to
efficiently source liquidity and conduct
their business:
— Liquidity access: Electronic RFQ allows
buy-side requesters to send enquiries
simultaneously to multiple liquidity
providers using pre-trade content and
analytical tools to aid their selection,
thereby reducing time to execution and
execution risk;
— Price transparency: Efficient and audit-
able price discovery is ensured by the
provision of ‘pricing screens’ that display
composite indicative pricing-level infor-
mation, or ‘axes’ to indicate strong buyer
or seller interest;
— Operational efficiency: RFQ offers a
seamless, standardised automated process
that captures every stage in the transaction
lifecycle; from pre-trade to clearing and
reporting. It also provides analytics to both
the buy- and sell-side on trades that they
have requested for pricing or have priced.
RFQ automates trading in a fully MiFID
II-compliant way. Buy-side firms are
expected to show their best execution
practices across instrument, broker and
order type, including the use of previously
high-touch block trading protocols. RFQ
supports electronic audit trails, reference-
able prices, and time stamps, thus helping
to quantify trading risk and costs, on a
scalable and trade-by-trade basis.
Furthermore, the RFQ model offers
enhancements to the existing system of
indications of interest (IOIs), with respect
to the need for the buy-side to provide
strong evidence around execution decisions
under MiFID II. By aligning RFQ with IOI
classifications, a stronger audit trail can be
created and more data-driven information
obtained in order to improve future broker
selection for risk/block trading. IOIs can
be put into competition, allowing buy-side
firms to filter and refine the type of liquidity
they want to interact with.
Informed choices
Trading in size has significantly changed with
MiFID II, the introduction of double volume
caps (DVCs) to restrict certain dark trading,
and the shift of liquidity to emerging Sys-
tematic Internalisers (SIs), LIS venues and
periodic auctions. In the midst of these shifts,
accessing liquidity and transacting in the best
interests of the end investor remains key.
RFQ offers a technological innovation in
cash equity trading. In essence, RFQ en-
ables both buy-side investors and liquidity
providers to continue to realise the benefits
of relationship-driven trading via a MiFID
II-compliant platform. Ultimately, buy-side
firms need to make informed choices across
a wide range of execution options, and RFQ
platforms help their dealers to do just that.
“Buy-side firms
are more open
than ever before to
alternative methods
of transacting and
interacting with their
preferred sell-side
brokers, so long as
that allows them to
optimise their ability
to transact.”
Issue 1
TheTradeNews.com
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