Panacea or Pipedream? RFQ arrives in Europe’s cash equities market

Panacea or Pipedream? RFQ arrives in Europe’s cash equities market


Tim Cave, Analyst, Tabb Group




Tim Cave researches and writes about major European market structure issues affecting the equities and listed derivatives markets.


Tabb Group was asked to critically assess the emergence of RFQ protocol in Europe’s cash equities market. Their findings were based on in-depth conversations with:

  • Major sell-side and buyside firms
  • Electronic market makers
  • Venue operators


RFQ for cash equities


Market makers are very positive about the RFQ trends, and – while buy-side firms did have some concerns – they do see the benefits in some circumstances


Why are RFQ systems being launched in equities markets now?

  • Lit trading protocol under MiFID II, specifically RTS1
  • On-venue transaction
  • Provides electronic audit trail for best execution
  • Proven mechanism for risk-based trading, which MiFID ii is promoting


Are you using/deploying more risk capital under MiFID II?

  • Yes: tier-two sell-side, market-makers, buyside
  • No: tier-one sell-side


How the equity market trades under MiFID ii

  • SI 4%
  • Auction 13%
  • Lit 48%
  • Dark 5%
  • OTC 30%


Is risk trading on the rise?

  • There is no clear trend between January and October for addressable SI>LIS.
  • Addressable SI<LIS and Total ELP SIs appear growing. ELP SI went from 0.3bn euro to 1.3bn euro.
  • Addressable removes after-hours trades.


“New risk providers are emerging under MiFID II. For instance, ELP SI as a % of addressable SI<LIS now equates to 32%. The top three ELPs trade between 350 and 300 million daily. They’re becoming a significant liquidity source.”


The buyside view and demands


·       Automates risk trading for medium-sized order flow;
·       Improve governance around broker selection;
·       Create central IOI portal;
·       Familiarity with RFQ;
·       RFQ quotes are firm.
·       Information leakage;
·       inconstant use by brokers;
·       Requires disclosure in RTS28 reports.




Buyside demands for RFQ platforms:

  • Receive quotes in line with AFME/IA IOI framework;
  • Receive two-sided quotes to hide side of transactions;
  • Observe execution quality statistics per broker/risk provider.


The sell-side view


Tier-one sell-side
  • Highly sceptical, a ‘winner’s curse’;
  • Unlikely to use RFQ at their outset;
  • Using less capital under MiFID ii;
  • ‘Bad apple’ could ruin RFQ for all – “we are using less risk under MiFID ii and being more selective about who we provide that risk to. We would rather have a bilateral relation ship and don’t see the benefits of RFQ.”


Tier-2 sell-side
  • Positive, the tier-2 sell-side see RFQ as a way to better distribute capital;
  • Under more pressure to automate parts of high-touch franchises;
  • Using more capital under MiFID II.


The market maker view


“The RFQ is an alternative mechanism to deploy risk, and the disclosed RFQ model encourages larger trade sizes. It also represents an alternative to Systematic Internalisers, which is not appealing to every risk provider (e.g. Dutch market-makers).”


Quote from one market maker: “We’re an SI but do not see that [RFQ] is an avenue for trading blocks. We would be more willing to provide size by RFQ because we know who we are providing to.”


Not every RFQ systems is the same and there are plenty of alternatives such as platforms such as eBlock and other Fully-disclosed RFQs, Instinet Blockmatch RFQ etc.


“There are challenges to RFQ adoption, and it’s not going to revolutionise equity trading initially. It may be a suitable for proportion of buyside equity order flow over time, as it’s highly MiFID ii compliant, but there’s a long road ahead.”