MY PROFILE LOG OUT FEED THE FORUM ADVERTISE SEND AN INVITATION EQUITIES DERIVATIVES FICC FINTECH/CRYPTO REGULATORY LIQUIDITYMATRIX SPOTLIGHT SERIES VIDEOS PHOTO GALLERIES EVENTS June 25, 2019 Are You Ready for RFQ In Electronic Trading? Patrick Gardner Vela Follow | Profile | More Share While many Chicago- and New York-based futures and options markets have migrated price discovery to the screen away from trading pits, it seems the European exchanges and those who regulate them are looking for a similar shift away from the phones. As more volume has moved to the screen, we have seen the tightening of bid-ask spreads. While this can be painful for some market makers, those with the best pricing tools, capacity for risk management, and the ability to automatically quote a two-sided market can still flex these capabilities. Although the trading of options on futures has been predominantly electronic for some time, it is only since the CME Group (and the ICE soon thereafter) moved to a user-defined spread model initiated by a Request for Quote (RFQ) that we have seen significant growth of electronic spread trading in these markets. By avoiding the need to formally list all possible instrument combinations, the RFQ function has instantly allowed the exchange to realize massive bandwidth savings and less daily maintenance with regard to settlement pricing. It has also facilitated the growth of more profit-generating uses of bandwidth, such as weekly and even daily option expires. Spread trading & RFQ trading Smaller market participants have gained the ability to design an option spread instrument that is right for their desired risk profile and to secure a tradable price from multiple sources electronically. The same concept can apply to larger but less frequent market participants; we have seen agriculture and energy firms designing options calendar spreads that consider the seasonality of the commodities they produce. Since spreads are executed as a complete package, both market participants eliminate leg risk and fill uncertainty. As more volume has moved to the screen, we have seen the tightening of bid-ask spreads. While this can be painful for some market makers, those with the best pricing tools, capacity for risk management, and the ability to automatically quote a two-sided market can still flex these capabilities. Another positive development for market makers is that roughly 60% of all executed options – regardless of asset class – are traded as spreads that were RFQ’d. If something is initiated via an RFQ, then there is, or at least, should be, a higher desire of the counterparty to trade the instrument. By designation, market makers are willing to trade small quantities as long as it is at their desired price. This is something that is not always a reality in a trading pit or especially via a phone call. RFQ trading platforms While many Chicago- and New York-based futures and options markets have now migrated price discovery to the screen away from trading pits, it seems like the European exchanges and those who regulate them are looking for a similar shift, only this time away from the phones. Eurex, in particular, seems keen on this transition, introducing its EnLight RFQ platform last year and even offering cash incentives for market maker participation. Eurex lists several “key benefits” on its website, such as “increase your process efficiency” and “comply with Best Execution obligations.” [Related: “Panacea or Pipedream? Europe’s Equity Market Readies for RFQ] Any adjustment in trading or market structure will have an effect on the participants in a market. Any successful market will also require different participants with their dissimilar risk appetites and time horizons. As the introduction of the RFQ function continues to have an overall positive effect, we expect that it won’t be long before it is viewed as normal in European markets and others as it already is in the U.S. This being the case, firms will need to ensure they have the capability to interact electronically with RFQs. Vela is a Eurex EnLight Prime ISV.
I have used CME direct in the past to get access to RFQ for options on futures spreads. Not only can MM respond but so can you.