Tradeweb and Plato Bring RFQ Model to Cash Equities

Tradeweb, one of the pioneers of the request-for-quote (RFQ) system in electronic fixed income, and a significant consortium of buy- and sell-side firms, the Plato Partnership, have joined forces to bring a new way of trading equities to European markets, amid significant shifts in market structure brought about by sweeping new rules in the revised Markets in Financial Instruments Directive (Mifid II).

The two firms will be releasing Tradeweb Plato eBlock, a platform for trading large-in-scale equity orders. Phase one of the project, set for the third quarter of 2018, will bring RFQ functionality to the platform.

Better known for their role in fixed-income markets, RFQs allow a trading firm to send out, as the name suggests, requests to a number of dealers for a price on a certain quantity of instruments. Given thin volumes in bond markets, and a paucity of reference and market data relative to other asset classes, they have been successful as a means of liquidity and price discovery.

Equity markets, however, are structured differently. While RFQ processes have been successfully introduced—by Tradeweb, and others—in the past for areas such as exchange-traded funds (ETFs), futures and options on equities and convertible bonds, this is the first time the company will deploy them into cash equities.

“With Mifid II bringing in a series of waivers, including large-in-scale waivers, the thinking was that we might get more requirements to trade blocks, and that’s where the collaboration started,” explains Adriano Pace, managing director, equity derivatives at Tradeweb. “We looked at whether there was a way to get a trade that had a sense of urgency to it done between buy-side investors and sell-side dealers in a way that is very efficient, which is fully audit-trailed, and where the liquidity providers are willing, within the platform, to share their principal risk positions with clients they’re comfortable showing that to.”

Tradeweb and Plato are not the first firms to pilot such a scheme. Earlier in 2018, Nomura-owned agency broker Instinet announced that it would be offering RFQ for equities via its Blockmatch multilateral trading facility (MTF) in March.

Part of the reason for this is the fact that RFQ mechanisms are seen, under Mifid II, as a form of disclosed—or “lit”—trading, and are thus exempt from restrictions on trading stocks in the dark through the double volume cap (DVC). Stocks are prohibited from trading on dark venues if they breach specific thresholds (see chart).

The cap, which was meant to drive volumes from dark venues and onto registered exchanges, has instead resulted in a fragmentation of trading activity among workaround entities such as systematic internalizers, which replaced the old broker crossing networks that were outlawed by Mifid II, and periodic auctions, which have gained tremendous popularity since the start of the year.

“Mifid II has undoubtedly been the main driver behind the new cash equities RFQ platforms,” says Tim Cave, a London-based analyst at Tabb Group. “The rules have also made block trades a more compelling part of the marketplace and encouraged the development of alternative venues that allow the buy side to transact in size with discretion. Allied to that is the fact that brokers need to find ways to deploy risk capital in an automated fashion. RFQ is one solution of many; it potentially has a place but the buy side needs to get comfortable with it.”

The quality of the data will be key to this project. Traditionally, while an investor may have gone first to a dark pool or a matching engine to find natural flow, if that proved fruitless, then other block services may have been a natural next step. With eBlock, Tradeweb’s Pace says, the RFQ functionality gives a buy-side firm another option—and one that may not even require multiple dealers.

“With the RFQ platform, you could go to multiple dealers at the same time, and that’s what we’ve seen in a variety of our products—you can go to two, three, or four dealers,” he says. “But it could also be that, because of the quality of the data, you could see clearly that one dealer is axed in the size that you’re interested in trading, and you just aggress them.”

Cave adds that he wouldn’t be surprised if more venues decided to extend RFQ models currently used for ETFs into cash equities, in response to Mifid II.