Guillaume Battini, Head of New Projects and Advanced Solutions at Euronext talks about injecting greater liquidity into the SME market.
What is the history of Euronext Block?
Euronext Block was first started in 2018, when the MiFID II regulations and Large-in-Scale orders (LiS) came into effect. In 2019, we launched a consultation with buy and sellside firms to identify gaps in the market and help us understand how we should further develop the platform. The process also allowed us to fine-tune it to local requirements.
What made you decide to focus on SMEs?
We held regional workshops across Europe and realised there was a real interest in trading small to medium sized companies but that there was a gap in the market for SME block trading. Our main focus was to ensure client requirements were met and to enable them to tap a new pool of liquidity. Local brokers do not always have the appropriate tools to trade small to medium sized caps. In the past, they would use the phone to conduct business but that was an inefficient and manual process. It took a long time to build a book because you had to call many different participants. We decided to give them a secure environment in which they could efficiently communicate and trade these stocks.
Can you describe some of the features?
The platform supports both conditional and firm order types and has randomised auctions which can protect execution price and maximise liquidity. The auction period starts at the moment the last firm-up response has been received or after 2 minutes, whichever is sooner. This facilitates the trading of small and mid-caps. After this period, the auction uncross is triggered at a randomised moment. Firm orders can participate in the auction as long as they are in the order book before the uncross is triggered. The main benefits are that there is no information leakage, nor price impact, whilst allowing a maximum number of participants to trade.
The platform also accepts pegged, limit and market orders as well as midpoint orders which can match any other order type. This also allows for price discovery and the potential for price improvement.
What makes the liquidity on the platform unique?
Our platform brings together different types of players who won’t necessarily have access to other platforms, making the SME liquidity unique. From there, we expect liquidity to grow as the number of trades increases, along with the raised interest in the platform.
Market participants can trade above LiS in a safe environment, limiting price impact. The emphasis is on size over speed in the matching process, which not only improves fill rates for larger blocks but also reduces the impact of interacting with smaller orders. We also conduct rigorous score carding, performance monitoring and third-party market toxicity analytics.
What are some of the newer functionalities?
In addition to standard orders, we have introduced Wave For Liquidity (WFL) which optimises the Indication of Interest (IOI) structure but makes it work smarter. It is an innovative message and counterparty selection functionality, which transforms the bilateral nature of taking SMEs to multi-lateral. WFL provides deeper liquidity by allowing members to pro-actively source one or multiple counterparties to trade blocks of shares with. This increases trading opportunities with dedicated counterparty categories, such as local market specialists actively replying to WFL messages.
We also use as much data as possible – historical and trade – to create a distribution list of targeted and specialist local brokers who trade SMEs. This brings concentrated liquidity and the best prices onto the platform. At start, WFL will be provided for products listed on Euronext’s regulated markets and will be easily integrated into existing workflows.
What are your plans for Euronext Block in the coming months?
There will be over 2,000 stocks available for trading on the platform, covering 12 national markets: Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain and Sweden. Clearing will be done by LCH SA and EuroCCP.
We will start in Paris and Lisbon and then expand it out to other geographic zones as the quality of liquidity builds on the platform.
What should be the position of the buyside regarding this initiative?
We think it is very important to have a three-way conversation between exchanges, brokers and buyside firms to ensure that we can meet our client’s requirements. In our model, the buy-side institutions access the platform via their chosen broker and this way, can interact with each other. Euronext Block offers a secure environment to trade to buyside firms, both in terms of information leakage and price impact. For these reasons, we believe buyside firms should ask their brokers to execute orders on Euronext Block so they can directly access this quality and unique liquidity.
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