Natan, how does it work and why are you launching this service now?
Natan Tiefenbrun
Cboe BIDS VWAP-X will be a first-of-its-kind, exchange-operated trajectory crossing service for European equities, allowing participants to source and match scheduled volume which is executed at a forward benchmark price. We will offer this new crossing service through the very successful Cboe BIDS Europe platform, and trades will be executed based on a standard, exchange-regulated volume weighted average price (VWAP) methodology. This will help investors to meet their participation-based algorithm volume schedules and price objectives, based on an industry-approved VWAP pricing methodology.
The growth in systematic and passive investing has led to more institutional order flow being transacted through participative trading strategies, which typically seek to achieve an average price over a defined time period. This service is our response to that trend and is highly complementary to our existing range of order books. Given that venue-based trajectory crosses solutions have started to gain traction in US equities, global banks and brokers now have improved capability and experience to access such liquidity. The strong group of firms that we recently announced as supporting our service from launch demonstrates that European brokers are now ready to execute their institutional order flow in this way on exchange.
Stephen, what are the benefits of offering this service through Cboe BIDS Europe?
Stephen Berte
Offering the service through Cboe BIDS Europe, the region’s largest block trading platform, is important for a few reasons.
The first is utilisation of its proven conditional workflow. This helps to minimise the opportunity cost of using the service and allows participants to continue to work orders elsewhere whilst seeking matches in VWAP-X. Participants can submit VWAP-X indications of interest (V-IOIs) to the system to identify potential matches. Once a match is found, the firms are invited to ‘firm-up’ their IOI within a specified time period as part of a bilateral trade negotiation and a matching cycle then begins to determine the interval-VWAP execution price (see box-out for more information).
The second is ease of accessibility. As Europe’s largest block trading platform, Cboe BIDS Europe already has well-established connectivity among Europe’s leading banks, brokers and its buy-side community. At launch, sell-side participants of Cboe Europe will be able to submit V-IOIs using their existing Cboe BIDS Europe connectivity.
The service will also utilise the unique BIDS Scorecards to promote positive interactions on the platform and provide protection against potential information leakage. Additional features will be added to monitor for activity during and after the VWAP matching cycle. In line with all other exchange activity, Cboe Europe’s market supervision team will also be responsible for surveillance of participants’ use of the service.
Natan, what are the benefits and why now?
Customers understand the benefits of achieving the VWAP price without incurring any spread cost or slippage. In Europe, many brokers pursue this through algorithms which follow a volume-based trading schedule, meaning they participate in proportion to anticipated market volume, with child orders fed into the market progressively; but with this approach the risk of price slippage remains.
The benefit VWAP-X brings is being able to achieve a more consistent execution outcome, allowing participants to perfectly match agreed volume at the VWAP without either incurring spread costs. The service is designed to encourage interactions between natural buyers and sellers with a common execution objective and benchmark.
The exchange-regulated nature of the service also confers many benefits. Orders will be executed at a standardised VWAP price methodology, utilising price data from Cboe, other pan-European markets and the listings exchange. All trades are also executed as ‘off-book, on-exchange’ transactions through either Cboe’s UK or Dutch exchange, published on our market data feeds and then sent to clearing under Cboe Europe’s interoperable clearing model.
Stephen, how might the model evolve in the future?
It’s important to say that we’re launching initially with a relatively straightforward VWAP model in Europe, but we’re already excited about how this might evolve given the long list of additional features participants are already asking for. Whilst we’re starting with Europe our plans are to introduce this functionality to the global BIDS platforms, both the BIDS platform in the US, and the Cboe BIDS platforms in Canada, Australia and Japan.
At launch, Cboe BIDS VWAP-X in Europe will be accessible only by sell-side participants, which can use their existing Cboe BIDS Europe connectivity to submit VWAP indications of interest. As with our current point-in-time block crossing platforms, we do hope to be able to allow direct order entry by the buy-side through the BIDS Trader GUI. In time, we may be able to use this service to contest for other types of flow which remains strongly tied to the listings exchanges.
How will matching happen in Cboe BIDS VWAP-X?
- VWAP-IOIs are submitted to the Cboe BIDS Europe system to identify potential matches.
- Once a match is found, the firms are invited to ‘firm-up’ their IOI within a specified time period as part of a bilateral trade negotiation.
- Once all firm-ups are received, eligible orders are matched with an agreed quantity, and a matching cycle then begins to determine the interval-VWAP execution price.
- The trade is executed on-exchange through the applicable Cboe exchange.
- The trade is sent to clearing under Cboe Europe’s interoperable clearing model.
- The trade is reported through the Cboe CXE or Cboe DXE market data feed as an off-book, on-exchange, trade in real time and uniquely identified with the new sub-MIC codes of XWAP (CXE) and VWAP (DXE).
