[ I N - D E P T H
bans on certain types of trading
when a transaction accounts for
4% of the total activity on a single
dark venue, or 8% of total trading
market-wide. Under the regulation,
RFQ is listed as one of five pre-
trade transparent trading methods,
meaning it is exempt from the
DVCs and it is considered to be lit
trading activity.
Regardless of this, genuine
demand for the product on the
buy-side has been difficult to find.
Senior heads of desks and traders
have instead expressed their
bewilderment about why a trader
would willingly and voluntarily
send out signals to a market usually
considered to be liquid and risk
creating a lot of unnecessary noise.
Many buy-siders didn’t foresee the
rise of RFQ in equities and remain
uncertain about where the execu-
tion protocol will sit in a market
which is still adapting to MiFID II
and the introduction of new block
trading venues, periodic auction
systems and SIs.
“RFQ for equities is just a poten-
tial alternative way of accessing
different sources of liquidity, and a
lot of buy-siders are sceptical about
the idea,” says Dan Nicholls, head
of trading at Hermes Investment
Management. “Since MiFID II has
tried to limit access to traditional
liquidity sources with the DVCs
to drive liquidity to lit venues,
the sell-side is forced to develop
alternative routes to match the
best price. To misquote Jurassic
Park: ‘Liquidity finds a way’. The
RFQ works well for fixed income
and ETF trading, but these are very
different instruments to equities.”
Nicholls adds that the RFQ is
often perceived on the buy-side to
be the ‘last chance saloon’ when
sourcing liquidity, explaining that
information leakage tops the list of
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R E Q U E S T
concerns around RFQ for equities,
and remains curious as to why a
trader would RFQ a sell order in
a rising market and, conversely, a
F O R
Q U O T E ]
some ways restricted: “There are
conceptually some valid use-cases
for RFQ in equities, although these
are currently limited,” he says. “For
“RFQ for equities is just a potential alternative
way of accessing different sources of liquidity,
and a lot of buy-siders are sceptical about the
idea.”
DAN NICHOLLS, HERMES INVESTMENT MANAGEMENT
buy order in a falling market.
“The signal to the market is that
the order is in the same direction
as the market move and that you
can’t find any natural liquidity,
which is powerful information,”
he says. “I would be happy to use
RFQ for equities to finish an order
on risk, because the liability for
the unwind then lies with the risk
provider. However, I would not
use RFQ at the start of a multi-day
order, as there is no way of know-
ing the origin of the price. If it is
natural or an unwind, then great,
but otherwise the order starts to
compete with the unwinding of the
risk price.”
For Neil Joseph, head of equity
trading at JP Morgan Asset Man-
agement, and Ed Wicks, global
head of trading at Legal & General
Investment Management (LGIM),
the RFQ for equities trading is a
compelling trend. But similar to
Hermes’ Nicholls, overarching
concerns with information leakage
means that it is unlikely the system
will be widely used across their
respective equities trading desks.
Joseph adds that the reasons
behind the development of each
RFQ for equities platform are
unique, but scenarios where the
RFQ would be used tangibly, and as
the platform providers hope, are in
our specific order flow, it will likely
be utilised for a lower proportion
of orders than RFQ for ETFs and in
a different manner.”
LGIM’s Wicks recognises that
RFQ for equities has its relevance
for some market participants, but
for smaller players that don’t have
the ability to transfer risk as seam-
lessly as Legal & General, alongside
integrated actionable indications of
interest (IOIs) and direct-to-cap-
ital type arrangements with bro-
kers, could experience problems.
“The equity RFQ model as it
stands is an interesting concept
and it will have relevance for some
people,” says Wicks. “If I am very
honest, it is not number one on my
to-do list, I don’t see the relevance
for our book of business currently.
There are other ways to transact
your business that result in poten-
tially less information leakage. I
can see that procedurally you may
be able to tick some boxes from a
best execution perspective, but you
have to be cognisant that you are
surrendering information when
you are going out on an RFQ.
“As long as you are aware of the
risks and you mitigate them to the
best of your ability, then it can have
relevance for certain asset manag-
ers, and maybe it will for us in the
future, but as the model stands, I
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