Pages: 27

Publication: 30 November 2022

Authors: Paul Besson, Head of Quantitative Research and Mehdi-Lou Pigeard, Quant Research Analyst



FX Global Code/Non-Code Assessment - Let Data Drive your Decision

Quality of execution comparison between FX Global Code signatory and Non-Code signatory liquidity providers across Euronext FX

In this paper, we compare the Spot FX liquidity on the Euronext FX and Euronext Markets Singapore platforms (together, Euronext FX) between liquidity providers that have signed up to the FX Global Code (Code makers) versus liquidity providers that have not signed up to the Code (Non-Code makers). Based on trades executed on Euronext FX, Code makers overall bring better quality of execution than Non-Code makers. Nevertheless, the analysis also shows that in 25% of cases, Non-Code makers improve the quality of the liquidity on Euronext FX compared to Code makers.



We first evidence that Non-Code makers account for 32% of the turnover on all crosses (see Table 2, p.5). We further show that no significant differences are observed between Code and Non-Code makers on a taker’s realised spread (see Table 3, p.7) and Markouts (Table 4 and Table 5, p.9). This dispels the preconception that Non-Code makers would display more leakage and larger Markouts.



We then show that Non-Code makers have a +12% higher rejection rate than Code makers (Table 6, p.11) on all crosses.



Lastly we evidence that Non-Code makers have a +0.12 bps larger expected slippage than Code makers (see Table 8 p.17) on all crosses. However, we further clearly show that in 25% of sessions, Non-Code makers have a better expected slippage compared to Code makers (see Table 8, p.17).



These conclusions support our view that, at this time, the most efficient response to the Code / Non-Code choice is for takers on our platforms to make a data driven decision regarding the make-up of their liquidity pool. To support this choice, we encourage our takers to perform an ongoing case-by-case assessment of their makers on Euronext FX.

Main questions on Code makers addressed

In light of the recent changes to the FX Global Code and increasing industry adherence, Euronext FX has taken a pragmatic stance, evaluating the pros and cons of its Code makers versus its Non-Code makers.



In this paper, we will provide answers to the following questions:

• How does the liquidity brought by Non-Code makers compare to that brought by Code makers?
• Are spreads higher with Non-Code makers compared to Code makers?
• Is there more leakage when trading with Non-Code makers compared to Code makers?
• Are Non-Code makers rejecting trades more often than Code makers? And at a worst timing?
• How can we assess the benefits brought by a maker from the taker’s point of view: the expected slippage?
• Are Non-Code makers worsening the taker’s slippage, on average? How often in this case?

To answer these questions we will study empirically the outcomes for a taker trading in anonymous sessions. We will measure from the taker point of view the consequences of trading with a Code maker or Non-Code maker.

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FX Global Code vs Non-Code Webinar

Watch the video of our Quant Research and FX teams explaining key results and answering a variety of quant, policy and liquidity management questions, to enable market participants to make data-driven choices.

• Is there a measurable difference in the quality of execution between Code signatory and Non-Code signatory LPs? 
• How did this research drive Euronext FX's latest policy decision around the Code?
• What trends have we seen in Code adherence of market participants on the platform? 
• And much more

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Pages: 28

Publication: 6 October 2022

Authors: Paul Besson, Head of Quantitative Research, Théo Compérot, Quant Research Analyst and Cheng-Feng Gu, Quant Research Analyst

In this note we show that the timing of passive trades is directly connected to overall passive execution prices, thereby connecting Markouts and passive execution prices.

We first evidence that the average passive selling price on Euronext is +0.60 bps higher than on Cboe, and +0.56 bps higher than on Turquoise (see Figure 4, p10).



We also show that unfavourable market timing for a passive trade is more likely (+6%) on Cboe and on Turquoise than when considering all venues together. Further, we evidence that favourable market timing is less frequent (-4%) on Cboe and on Turquoise than when considering all venues (see Figure 7, p13).



We recommend that the favourable price improvements seen for passive trading on Primary Markets should be taken into account explicitly by Smart Order Routers.

From Markouts to passive trading prices

Bridging Markouts and passive execution prices

While the relationship between Markouts¹ and adverse selection for a passive trader is well established, a worse Markout is often not considered by traders to be as detrimental as a worse execution price. This misconception arises from the fact that passive trades are always executed at a predetermined limit price, leading to a perception that the timing of the trade does not necessarily impact overall passive trading prices. In this note we show that the timing of passive trades is directly connected to overall passive execution prices, thereby connecting Markouts and passive execution prices.

How adverse timing selection leads to worse passive execution prices

We consider two traders with different Markouts over the same trading period. This difference in Markouts corresponds to a difference in the timing of the trades. The difference in trade times naturally leads to a difference in trading prices.



For this reason, when comparing two passive sellers, we would intuitively expect that the passive seller that has a smaller Markout and can avoid selling before a large price rise, would sell on average at a higher price than the participant that displays a larger Markout, and is therefore more likely to sell before the price rises.

Main questions addressed on Markouts and passive execution prices

In order to uncover the link between Markouts and passive trading prices we will provide answers to the main four questions below:

• How can we objectively assess the outcome of a passive trade on a given venue?
• Are average passive execution prices more attractive on Primary Markets versus MTFs?
• Do passive trades on MTFs take place at a worse market timing compared to passive trades on Primary Markets?
• Do worse Markouts and market timing lead to worse Passive VWAP prices on MTFs versus Primary Markets?

We will study the case of a passive seller over a 5-minute time interval. We consider the outcome of passive sells on the main Lit continental venues: Euronext, Cboe, Aquis and Turquoise. We show that venue choices lead to significant differences in outcomes and we relate these findings to the differences in Markouts across exchanges.

¹ For more details on Markouts, see our February 2022 Quant Note “Better passive posting across Lit venues based on quantitative analysis of Markouts” available on https://www.euronext.com/en/quant-research 

 

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Pages: 16

Publication date: 13 March 2023

Authors: Paul Besson, Head of Quantitative Research, Théo Compérot, Quant Research Analyst and Anatole Casimir, Quant Research Analyst

In this note we compare the relative performance of aggressive executions on Italian stocks, by comparing Lit trades on Borsa Italiana with trades on Equiduct MTF. To conduct this assessment we compare gross executions with the Primary Best Bid Offer prices. Our analysis is based on public market data from independent data provider BMLL, and is fully reproducible.



We first evidence that, when considering all trades from Equiduct APEX, retail gross trade prices on Italian stocks are worse than those on the Primary Market of Euronext Milan by -1.60 bps (see Table 4, p9).



Likewise we also show that, through Euronext’s Best of Book retail programme, Best of Book gross trade prices improve Primary Market quotes by +0.96 bps (see Table 5, p10).

Comparing retail executions on Primary Markets and on Equiduct (APEX)

On the Legacy Euronext Markets, retail traders can trade via the Best of Book model (later referred to as BoB), which enables aggressive orders from retail brokers to interact with specific retail quotes provided by designated market makers that supplement the all-to-all liquidity of the Euronext orderbook.

Another alternative for retail providers is to use the Equiduct APEX model (later referred to as EQDT), which allows aggressive retail traders to trade at the consolidated volume weighted at the best limits as computed by Equiduct (VBBO).



In order to compare the outcomes of these two models, we compute for each trade its Primary improvement versus the Primary Best Bid Offer. Thus we compare the Primary improvements offered by Equiduct and by Euronext Best of Book.



On Italian stocks, since orders are not specifically identified as retail orders on Euronext Milan, we compare Equiduct APEX retail trades with standard Lit aggressive trades on Milan market (later referred to as XMIL, its MIC code). We then compare the Gross and Net Primary improvements of these trades.

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