European proprietary firm Optiver has warned the launch of a speed bump to slow down aggressive high-speed trading on the Eurex DAX index options market could disadvantage liquidity takers.
Eurex is due to rollout the controversial programme, known as the Passive Liquidity Protection (PLP), on 24 August for all equity and DAX options, after already launching the speed bump for German and French equity options in June last year.
The initiative is aimed at levelling the playing field for discovering prices and boosting liquidity in the central limit order book for certain derivatives markets. As part of the PLP, a 1.5 millisecond time penalty on aggressive orders will be introduced on the DAX index options market, in a bid to protect liquidity providers.
However, the high-frequency trading (HFT) firm, which is in favour of the PLP initiative from Eurex, warned in a discussion paper on the expansion of the speed bump that any move to stimulate liquidity provision should be balanced with liquidity-taking strategies.
“Liquidity takers may no longer be willing to do certain trades if the proposed delay of 1.5 milliseconds on aggressing orders in DAX options leads to a loss of control over orders,” Optiver said in the paper. “If liquidity takers are unable to cancel orders in the deferral queue, it may result in dissatisfaction with the price at the time of trade.”
Optiver added that a delay on aggressive orders could also provide liquidity providers the option to choose when to cancel or amend orders, further disadvantaging liquidity takers. The paper summarised that the PLP programme may increase market complexity, while reducing transparency to the detriment of end investors.
“Whether Eurex’s PLP is the right tool for protecting liquidity providers remains to be seen and is something that needs to be closely monitored by the exchange and market participants, but in our view, exchanges offering liquidity protection in the options space, is a step in the right direction for creating a healthier market structure,” Optiver concluded.
Eurex introduced the speed bump in June last year in a bid to level the playing field for price discovery process in its derivatives markets, as opposed to penalising HFT firms.
“The programme differentiates passive orders verses aggressive speed. There is an inherent advantage of putting in an aggressive order. What we want to do is give an incentive to providing passive prices and reduce the risk of being picked off,” said Thomas Book, CEO of Eurex, at a London-based conference last year about the scheme.
In addition to Eurex, US exchange group ICE received regulatory approval last year to implement a programme called the ‘Passive Order Protection’ which will be applied to trades of gold and silver contracts, a relatively smaller market.