The art of designing markets. Part VI

Erscheinungsdatum: 19. Sep 2018 | Eurex Exchange, Eurex Clearing

The art of designing markets. Part VI

Eurex EnLight as a pillar of the future market structure

Market design recognizes that well-functioning markets are more than the confluence of supply and demand. They depend on detailed rules. Market designers try to understand the rules and procedures as well as the workings and requirements of particular markets well enough to fix problems or to build completely new markets when they seem promising.

This is article six in a series dealing with the market design of electronic market places. We started with the most common execution models in electronic derivatives markets, have covered the various components of an order-generating process that define its arrival time, reflected on the electronic exchange connectivity options for indirect exchange participants such as institutional and retail investors and for direct exchange participants, i.e. the members of the exchange. The fifth article looked at market segments in Eurex products that are organized outside Eurex by phone. This new article explains our new trading mechanism Eurex EnLight.

 
 

Randolf Roth, Member of Eurex Frankfurt Executive Board, responsible for market design

The last article explained that especially in options the European market for large or complex orders is, to a large extend, still organized via phone or chat. While this market structure has proven to work over a very long time in very different market phases, it is obvious that over time also this market structure will embrace electronified processes to increase efficiency and resilience of the off-book market segment.

Against this development, we believe that the MiFID II transparency and best execution requirements will be a catalyst towards a technology driven solution. To address this development, we build and are in the process to roll out a new trading mechanism called Eurex EnLight across our products. 

Eurex EnLight – a new add-on to our well-proven and connected trading technology 

The basic idea of Eurex EnLight is to add a selective request for quote (RfQ) mechanism to our trading engine T7, to capture the current manual off-book price formation processes in an electronic fashion and to smoothly integrate it with the existing Eurex trading and clearing infrastructure. As Eurex EnLight focuses on the current off-book market structure, it differs significantly from the central limit order book, typically offered by exchanges including Eurex. Major differences include

  • There is a requester to every trade and the requester requests a price from one or several trusted counterparts (as opposed to the entire market)
  • There is no anonymity between the requester and the responder(s) i.e. the requester chooses the responder and sees their responses while the responder sees only the requester but has no information on the competing responders
  • The price arrangement path offers several steps to the users and may include indicative requests and pricing. The exact steps of the path and therefore the length of this process is driven by the requester, typically a bank or a broker requesting prices for their customers

Transforming the manual off-book market structure into an electronic format 

Eurex EnLight seeks to make the transformation of the manual off-book market structure into an electronic format as simple as possible for the involved parties by providing direct advantages versus the established voice process:

  • Increase execution certainty by creating a streamlined STP process with the existing Eurex trading and clearing infrastructure
  • The requesters can contact several counterparts in parallel and electronically manage the responses within seconds
  • There is an automatic audit trail of all the steps, which can be used for best execution or internal transparency purposes

The service is currently live in fixed income options (including futures as part of options strategies) and Swiss Single Equity Options and Swiss index options (including futures as part of options strategies). It will be rolled out across all equity and equity index options (including the futures as part of the options strategies) in the first half of 2019.
 

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