Why the London Stock Exchange’s RFQ 2.0 is an ETP trading model serving market needs

As European ETP trading volumes continue to grow, brokers and their buy-side clients are seeking better trading liquidity outcomes and greater post-trade efficiency. Yet they are missing a big opportunity by still relying to a large extent on bilateral request-for-quote (RFQ) trading. European ETPs’ trading turnover to the end of October 2022 was €2.37 trillion, surpassing the €2.35 trillion total for the whole of 2021, according to big xyt. Of that, bilateral request-for-quote (RFQ) trading accounted for almost half, some 46%. The balance was accounted for by OTC systematic internalisers at 28% and central limit order books at 26%. But bilateral RFQ trading relies solely on interacting with liquidity providers, with no opportunity to interact with passive order book liquidity. Illustrating the size of this missed opportunity, the average daily value traded of the London Stock Exchange’s ETP order book in 2022 is £655 million, up 8% compared with 2021, and 8% of the ETP order book is executed using ‘hidden limit’ or ‘iceberg’ order types. From its early days as a manual click-for-trade service, the RFQ model has evolved to become more automated. Yet the fact that it remains bilateral results in drawbacks in terms of limiting the sources of liquidity available and the post-trade inefficiencies that naturally arise from bilaterally settling with many counterparties. Read More