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Eurex | Eurex Clearing
Eurex has structured a market model called Passive Liquidity Protection, which provides benefits to market participants who provide liquidity in the order book.
The next release of Eurex' T7 trading architecture, scheduled for 3 December, will provide the underlying functionality for this model. However, the step-by-step activation for individual products or product groups will not take place before the end of the first quarter of 2019. We are here in close coordination with our market participants. Further announcements will be made in November or December 2018.
Increase fairness in price formation
With the Passive Liquidity Protection, Eurex wants to give all market participants an incentive to place improved passive orders or quotes with tighter spreads and larger size in the options order book. Unlike active orders, passive orders do not have the intention of reacting on existing orders in the order book. Thus, passive orders are exposed to price changes – in contrast to market participants who merely execute orders actively.
The new model will allow Eurex to protect liquidity providers against adverse selection when updating order book positions in case of underlying movements. This is especially important in the more complex options markets where price formation is closely linked to the underlying. Passive Liquidity Protection will therefore be only introduced for options.
Improve order book liquidity
With the new model, each incoming order will be checked on whether it can be executed against an opposing order or quote at arrival in the order book; if so, it is considered an active order. Orders that have been identified as active will be deferred and will interact with the order book after a fixed deferral time. Passive orders and delete transactions are promptly processed and written into the order book. Liquidity providers therefore have more room to update their prices in case of strong underlying price movements.
Randolf Roth, Member of the Executive Board of Eurex, explains: “We want any liquidity provider to feel more comfortable to show bigger size and tighter spreads in the order book. And this will in turn strengthen the trust of customers to execute against resting orders and quotes creating further incentives for liquidity providers.”
Passive Liquidity Protection is one of many initiatives designed to create an environment which is as attractive as possible – ensuring that our clients find a high degree of liquidity in the order book.