Is RFQ a panacea for the equity market’s liquidity crunch?

Tried and tested over a number of years across different asset classes, request-for-quote (RFQ) platforms have begun to appear in the equities market. Are we about to see the RFQ protocol redefine how institutional equities traders access liquidity in a post-MiFID II world?

As liquidity is becoming more fragmented, executing medium to large sized trades on lit exchanges can be a challenge. Double Volume Caps (DVC) have restricted the use of dark trading and, combined with the banning of Broker Crossing Networks (BCNs), this has had the unintended effect of further increasing the pressure on liquidity.

However, as with the emergence of dark pools and alternative trading venues post MiFID I, the industry always finds a way to carry on trading effectively. Where there’s a will, there’s a way.

Post MIFID II, some venues have added RFQ support such as LSEG’s centrally cleared, on-exchange, automated RFQ, Tradeweb’s eBlock, TP ICAP’s Fusion and Instinet’s Blockmatch. We recently held a Liquidity Forum in conjunction with the LSE to discuss new ways to access liquidity and it’s clear that RFQ systems have a big part to play. Indeed, after the recent UK general election, the Iress network saw record volumes with over 73,000 RFQ-based executions that day alone, a 231% increase on average daily volumes.

The industry always finds a way to carry on trading effectively.

However, industry analysts have pointed out that some buy-side players do not see RFQ platforms as a natural evolution because they think of RFQ emerging in illiquid markets. So, is this a case of “provide the technology and they will come” or, despite the buy-side’s mixed reaction, is there a genuine need?

Pre-MiFID II, traders generally traded with one or two counterparties, simply taking the best price they were quoted. With MiFID II demanding proof of best execution, it’s essential to obtain a wide variety of quotes and then be able to prove that the best decision for the client was taken. RFQ platforms, with their electronic audit trails and wide networks of participants, seem tailor-made to overcome this challenge. The fact that they appear to circumvent the DVC rules could also be enticing to some.

The argument that RFQs are only viable for illiquid instruments is turned on its head by the retail market, already trading across the spectrum via RFQ. Relatively small trade sizes and a desire for fast, simple, best execution has driven the continued growth in retail RFQ volumes, but whether the larger institutional order flow will follow remains to be seen.

Liquidity in some segments of the market is notoriously light and working out ways to trade even in moderate size can be challenging. There is no silver bullet, rather a series of channels to explore whilst trying not to leak market information. RFQs are being offered as one of those channels.

At Iress we have recently added three new RFQ venues to our network, providing our clients with more options to seek out liquidity. It will be interesting to watch this space evolve and see if RFQ adoption rates grow over the coming months as these new services mature.

This blog was written by:
Russell Thornton
- Head of trading strategy at Iress