The operator of markets in Paris, Amsterdam, Brussels and Lisbon issued a call on August 12 for non-member firms and their brokers to participate in a six-month pilot liquidity scheme that will begin in the fourth quarter of this year, subject to regulatory approval.
The scheme will reward non-member firms that “make a significant contribution to the quality of the order book”, the notice read.
Fewer than 10 firms will be chosen for the pilot, based on factors such as volume and their trading style. As a guide, Euronext said only firms trading in excess of €200 million per day on Euronext-listed stocks across all venues would be considered.
Exchanges use incentive schemes to offer firms reduced fees or even rebates in return for providing prices for a specified period of the day.
Such schemes are typically only available to direct members of an exchange, meaning those prop firms that prefer to trade via a broker, often for reasons of cost or anonymity, miss out.
The London Stock Exchange allows its brokers to nominate non-members to take part in liquidity schemes, but they are more common on US markets than in Europe. Euronext’s move signals the efforts being made by the region’s markets to boost volumes amid slower activity, with European trading volumes down around 7% so far in 2016.
Danielle Mensah, head of cash markets at Euronext, told FN: “We are continually seeking ways to improve our marketplace and part of that is thinking about sources of liquidity and how we can help our clients to do more business with us. We think there is an opportunity to improve the market by creating a new liquidity scheme targeted at trading firms that execute order flow through members.”
Mensah said the new scheme was also appealing because it “protects the existing broker and end-client relationship” by allowing non-member firms beneficial fees without requiring a direct membership and cutting out brokers.
She said the specific terms of the liquidity scheme would be worked out with the pilot firms, but added Euronext did not envisage it would involve the payment of rebates.
“We have chosen to do this as a pilot to get this right and work out an appropriate design,” she said.
The names of firms in the pilot will remain anonymous to the market, but their names and the selection process will be disclosed to regulators, the notice read.
Under new EU trading rules being introduced under the revised Markets in Financial Instruments Directive, due to be implemented in 2018, stock exchanges will be required to have formal agreements in place with proprietary trading firms that act as market-makers, which must be fair and non-discriminatory to all firms to bring more predictability to their activity and prevent the firms leaving markets during times of stress.
Anish Puaar, a European market structure analyst at Rosenblatt Securities, said: “Putting this scheme in place will help to incentivise liquidity provided by prop trading firms. It is in keeping with the direction of travel under Mifid II, with exchanges having to put in place more formal market-making arrangements.”