Cboe BIDS VWAP-X, a trading service allowing participants to source and match liquidity at a forward benchmark price is due to launch in Europe before it is extended to other geographies. The service is scheduled to launch on 21 October 2024, subject to regulatory approvals.

Natan Tiefenbrun, president, North American and European equities at Cboe Global Markets, said in a statement: “We’re excited to be bringing this first-of-its-kind service to the European equities market and help enhance execution outcomes for end investors.”

Stephen Berte, president of BIDS Trading, the independent subsidiary of Cboe Global Markets, told Markets Media: “We have listened to our participants in Europe and the challenges that they have in sourcing scheduled liquidity and think this is a really innovative way to solve a specific problem.”

Cboe maintains BIDS as an independently managed and operated trading venue and broker/dealer, separate from and not integrated with the Cboe U.S. securities exchanges.

There is an opportunity to provide solutions for non-point-in-time crosses, given that many systematic and automated strategies rely on schedule-based algorithms, according to Berte. Schedule-based algorithms are executing based on logic the broker-dealer has defined within their suite, but fund managers are still looking for natural buyers and sellers who match on common criteria. Many broker algorithms follow a volume-based trading schedule, meaning they participate in proportion to anticipated market volume, with a transaction split into many small child orders that are fed progressively into the market.

Cboe BIDS VWAP-X will cover Cboe Europe’s full range of pan-European equities from across 15 countries and Berte thinks it will be used across a wide universe of stocks.

“The subset of liquidity that is moving into more automated channels is typically easier orders in more liquid stocks that do not necessarily require human intervention,” added Berte. “However, there is also a challenge for high-touch traders who are actively looking for contra liquidity in more difficult names.”

As a result, the protocol is likely to be used for liquidity-challenged names where traders are not necessarily looking for a point-in-time cross , but want to consume liquidity in a more continuous and frequent way.

Berte said the service is first being launched in Europe due to the significant first-mover advantage in the region, and the belief that  systematic trading will continue to grow in the region.

“In Europe we want to be the leading trading solutions provider for those going down that path,” he added. “The US is probably next in line and we have a lot of demand from our users and participants in Canada.”

He highlighted that there are some incumbents in the US, and so BIDS wants to offer a differentiated value proposition.

Interval VWAP benchmark

At launch, the only benchmark being provided by Cboe BIDS VWAP-X is a five-minute interval VWAP (volume weighted average price). VWAP represents the average price a security has traded at throughout a given time period, based on both volume and price. It is commonly used as a trading benchmark by investors seeking to trade participatively with volume, and who want to determine whether they bought or sold a stock at a good price.

Traders flag conditional indications of interest (IOIs) to Cboe BIDS VWAP-X, so that they can potentially be matched based on common criteria. The conditional IOIs need to be firmed up in a bilateral trade negotiation, and the interval-VWAP price is calculated by consuming a consolidated market data feed. If that pricing cycle is successfully completed, then the protocol provides the VWAP fill at the end of the interval. Trades will be reported as off-book, on-exchange executions in real-time, allowing them to be centrally cleared through Cboe Europe’s interoperable clearing model.

“We wanted to narrowly define what we were looking to achieve through an interval VWAP,” said Berte. “However, we think we can take this protocol and apply it to other types of intervals such as VWAP over the day or percentage of volume on market close.”

At launch, the protocol is a sell-side service. The exchange will create a sample set to understand how the protocol is being used, with the ultimate goal of being able to allow the buy side to directly place IOIs at a future date through a sponsored broker model.

Participants for launch

Cboe said in a statement on 2 September that early adopters of Cboe BIDS VWAP-X include Bernstein, BNP Paribas, BMO Capital Markets, Instinet Europe, Jefferies, KCx and Virtu Financial.

Berte said there are numerous others also working towards go-live readiness. He added: “This is a huge testament to the creativity and the innovation of this service and certainly exceeded our initial expectations.”

Salvador Rodriguez, EMEA head of global execution services, at Instinet Europe Limited, said in a statement that benchmark crossing is an encouraging innovation in EMEA that should improve the ability for algos to find high quality counterpart liquidity.

“The approach and implementation should allow for agency algos to trade versus multiple benchmarks at a fair price with a good balance of simplicity, as well as allowing more complex control features based on differing client interaction requirements,” Rodriquez added.

Eric Stockland, co-head of global electronic trading at BMO Capital Markets, told Markets Media that trajectory crossing exists in the US on a couple of different platforms. He said: “We hear a lot from clients on how much they like them.”

Stockland said that in the US trajectory crosses are a small but “really important part” of the equities market for clients who want to achieve an average price, which they consider to be fair, by agreeing to trade at a market price at a forward point in time.

He used the analogy of buying an apartment in a building with 80 floors and 10 apartments on a floor. The buyer and seller may agree to use the average price of the next 10 sales, as they both consider this to be fair.

“We really like these mechanisms and clients really like these mechanisms,” said Stockland. “There is nothing like it in Europe so Cboe is bringing something that is really going to benefit the industry, so it is a great innovation.”

Stockland highlighted that another venue that provides a trajectory cross in the US, PureStream, has ambitions to launch in Europe.

“It is great to see this cross pollination of US market structure coming to Europe and vice versa because we are all global,” said Stockland. “The firms are global, the operators are global, the clients are global and we are realizing that import and export work.”

He expects new growth in this type of product as there is more adoption across the sell side. BMO Capital Markets is going to update its algorithms to include the new service and gather data and analysis, and make sure that the empirical case aligns with client needs.

“We trust but verify, and clients will be really keen to see early data coming out of this,” Stockland added.

If it becomes cheaper for systematic firms to implement trades, they may trade more which Stockland described as a “win win,” and could help increase trading volumes in Europe.

“The venue is going to get some marginal business, the brokerage community and clients are going to get improved performance, and hopefully we are all just trading more and happier with the outcomes,” said Stockland.