Cboe Europe has confirmed plans for the launch of its new volume weighted average price (VWAP) crossing service for equities at the end of this year.
Set to launch in the fourth quarter, the VWAP-X service will be made available through block trading platform Cboe BIDS Europe and will give users a greater chance of sourcing and matching liquidity at a forward benchmark price.
Natan Tiefenbrun
It will utilise BIDS’ conditional trade negotiation and execution workflow to match orders based on a standard and exchange-regulated VWAP methodology. Participants will be able to submit conditional VWAP indications of interest (IOIs). Once a potential match is found, firms will be given the opportunity to firm-up their IOIs.
Trades will be reported in real time as off-book on-exchange executions. They will be centrally cleared through Cboe Europe’s clearing model.
“If you’ve got natural buyers and sellers trading participatively using VWAP, %volume or anything quasi-scheduled or using a volume tracking component, you can match the buyer with the seller without either one of them having to incur spread costs,” president of North American and European equities at Cboe Global Markets Natan Tiefenbrun told The TRADE.
“Brokers are going to submit indications and then we’re going to match those indications and invite the respective counterparties to submit firm orders for matching. It’s like a forward price benchmark cross where you agree the quantity and the time horizon and it’s a VWAP benchmark but the forward element is the VWAP for the next N minutes. Only at the end of the period do you find out what price you traded at.”
Once launched, the service will be accessible by sell-side participants through FIX connectivity. Testing will begin in Q3 ahead of the Q4 launch, subject to regulatory approvals.
Europe’s first mover
While this workflow is common in the US, Cboe’s new service will be the first of its kind to launch in Europe. Other European venues are reportedly also exploring launching similar new services. Aquis is rumoured to also be preparing for the launch of a similar offering before the end of the year.
When reached out to by The TRADE in May, the exchange declined to comment.
Meanwhile, some of the existing US-based players that leverage similar business models are also weighing up an expansion in the region. Among the names allegedly exploring a move are PureStream and IntelligentCross. Also planning to make a move is OneChronos which is set to launch in Europe in 2025.
Read more – Early bird catches the worm: A look at the race for first mover advantage in Europe’s emerging crossing network landscape
Crossing services as a concept is not a novel one to Europe. Scrapped in 2018 under Mifid II, former broker crossing networks (BCNs) used a similar workflow. Prior to the regulatory change that banned the “venues” among other market changes, many brokers would leverage their algo plant to do VWAP or trajectory crossing.
“It was a market mechanism that was very value additive to institutional customers of brokers that essentially was substantially withdrawn from the market because of Mifid II,” explains Tiefenbrun.
Cboe is now set to become the first mover in this space, reintroducing this workflow to institutional investors. The challenge, he explains, in launching the capabilities as a venue is the risk of information leakage.
“It’s different messaging and event workflow and a different information dynamic. You need the messaging flow because doing this in an external venue is very different to having an internal process peering over the algo engine wall to see how many orders there are and which ones might match,” he says.
“In our model as a venue, we’re going to have to tell brokers you’ve got a preliminary match. That means potentially that people now know something that they might not have known before. You do have to really think through the information dynamics and how you’re going to monitor and survey use to the service very carefully to make sure there is no abuse.”
Cboe confirmed in a statement that the new service will benefit from BIDS’ protections against information leakage surrounding IOIs, including disclosure and interactions controlled by customisable tools and counterparty score-carding and filtering based on past trading behaviour.
The exchange has secured the MIC codes VWAP and XWAP for its new service. A Cboe spokesperson confirmed pricing details for the new service will be confirmed closer to the launch.
Tiefenbrun was unable to confirm whether the service is set to launch on Cboe’s US venues simultaneously given the regulatory separation between Cboe and BIDS in the region.