RFQ for Equities: One Year On
The Tradeweb request for quote (RFQ) equities platform is celebrating its one year anniversary. And what a year it has been. Liquidity provision has grown from four to nine dealers and the number of clients is now in double digits. By customising the RFQ to the intricacies of the market, participants can now trade both above and below Large in Scale (LIS) with no restriction on size, and take advantage of our Automated Intelligent Execution (AiEX) tool.
We're making significant progress in the provision of liquidity, as well as the nature of the transactional value that is occurring on the platform
It is significant to note that the volume requested as a multiple of national best bid offer (NBBO) touch volume has gone up. In terms of the multiple of the touch volumes, the average trade size at Tradeweb is €1.5m, which is over 300 times the available touch liquidity seen in the lit market (at approximately €10,000). While the bid-offer spread across the lit market has widened during the past year, the pricing spread on our cash equities platform has compressed. The average trade size in terms of the proportion of the day's volume has increased, while the quoted spread from dealers has improved by 35% over the past year. The speed of response has markedly improved by 44% and the minimum quote time has reduced to 3 seconds, with the quickest RFQ improving by about 80%.
We have observed that clients are using Request for Markets (RFM) more often
While an RFQ is a fully-disclosed directional request, an RFM is a request for a two-way price in order to avoid disclosing the direction of a trade. We are currently observing an increase of requests for two-way prices, in a tighter-pricing environment. This is probably due to the fully-disclosed nature of the RFQ protocol leading to good discipline in the way people are using the system, combined with the RFM resulting in more aggressive quoting from dealers (i.e. clients are seeing an improvement on pricing) despite not revealing their direction.
RFQ for equities is no more toxic than other execution methods and is a stable pricing protocol
There were many concerns expressed in the cash equites space at the launch of the RFQ around signalling, toxicity and information leakage. Over the past year, Tradeweb has done a lot of work with both buy- and sell-side clients on this, and how it relates to our equity protocol. Working with a third-party data provider, we have shown that minimal information leakage occurs when trading cash equities via RFQ on Tradeweb.
Rather than being a “last chance saloon for liquidity”, our research demonstrates that the reversion is not any worse when trading on our RFQ versus other comparable venues such as Systematic Internalisers (SI), despite a larger average order size. Even post-execution, we are not seeing any kind of drift or significant mark-outs to suggest a problem in this area. The idea behind the RFQ being toxic, therefore, should be dispelled because: (a) there is no discernible difference in toxicity to comparable venues; (b) a tighter price is achieved by sending a request out to more than one broker; and, (c) the average trade size on Tradeweb is three times larger than other comparable venues, giving our clients improved access to liquidity using the protocol. Ultimately, RFQ is a risk-trading protocol that can be used alongside other principal-based protocols as an important part of a trader’s workflow.
We are also introducing some forward-looking ideas in terms of the way we are automating
AiEX gives institutional investors the ability to trade directly from their order management system (OMS) using a predefined set of rules. Initially developed to address capacity issues during high volume periods, the tool has quickly adapted and scaled from smaller orders in liquid asset classes to less liquid asset classes in larger sizes. Deployed strategically in the context of cash equities, AiEX will provide an opportunity to conduct an initial sweep of the market to see if a contra IOI is available and only when it is, will an RFQ be activated.
RFQ for equities is here to stay
Tradeweb’s RFQ protocol stands out from the crowd against exchange-hosted or other RFQs. As opposed to sitting on the child order logic on a central limit order book, the RFQ sits further up the workflow for larger trades, which means clients have the option to decide to trade before going to the lit market. We believe that the fully disclosed nature of the protocol is driving a lot of the good behaviour and stable pricing on our platform. Furthermore, we have endeavoured to ensure that the RFQ sits seamlessly in any workflow. An audit trail of received quotes is available and for post-trade purposes, there is a record of what has been executed against and metrics around evaluation, as well as the possibility to create customisable parameter-based trading with AiEX to suit a client’s particular needs.
The cash equity RFQ protocol has established itself as a key tool in the search for principal liquidity, and we are excited about the new developments and how we see it evolving over the next year. By applying the significant amount of experience Tradeweb has acquired from applying the RFQ to over 40 other products, we have been able to establish a robust use case in equities that helps deliver straight-through processing, a full audit trail for best execution, and automation benefits.
All figures quoted in this article have been sourced from Tradeweb data, Q4 2018 – Q1 2019 versus Q2 – Q3 2019.
To learn more about our European cash equities platform, click here.