Interview with Murrough O’Brien, Head of Cboe BIDS APAC
How was Cboe BIDS Australia launched?
We launched Cboe BIDS Australia (“BIDS Australia”) this year in two phases. On March 27th, we launched with sell-side access which allowed brokers to set up and use their algorithms and direct market access (“DMA”). On September 18th, we successfully launched the buy-side sponsored access via the BIDS Trader graphical user interface (“GUI”).
We launched BIDS Australia in two phases to build liquidity via the broker algorithms and DMA, so that by the time we launched the buy-side BIDS Trader GUI, the buy side would have immediate liquidity to engage with. That was how we launched the BIDS service successfully in Europe and we wanted to take the same approach in Australia.
What have been highlights/milestones since BIDS Aus launched? What has been learned?
The launch of the product was a massive milestone for both Cboe Australia and the market itself. The ability to submit conditional messages via BIDS in the US, Europe and Canada has been around for several years, and bringing BIDS to a new market is expected to be transformative.
It’s been a long journey because Australia never had a ‘conditional messaging’ venue like BIDS, so we put a lot of effort into educating the sell side and buy side and working closely with the regulator to ensure that they were comfortable. So actually, just going live was a major achievement. Since the launch, we’ve seen continuous trading and growth in liquidity, and we expect that to continue as more brokers and buy-sides come on board.
How does BIDS Aus work and how is it differentiated from other trading venues?
There are several ways in which BIDS Australia is different from other venues. First off, BIDS Australia supports conditional messaging within exchange infrastructure, which is new to the local and, in fact, APAC markets. Compared to other exchange and block trading venues, we have a unique mix of sell-side liquidity through broker algorithms and DMA and buy-side liquidity via the BIDS Trader GUI that’s anonymously co-mingled in a way that hasn’t existed before.
Through conditional messaging, sell-side liquidity exposes uncommitted volumes via brokers algorithms to an anonymous pool and this is also very novel in APAC.
A major focus of BIDS is to protect our clients from undesirable behavior, such as counterparties not “firming-up” (not attempting to execute). To help reduce these interactions, BIDS has a systematic policing mechanism called the Scorecard. This scores all users (sell-sides and buyside dealers) over time and helps them filter out potential poor interactions. All users are treated equally, and Scorecard decisions are made on a quantitative not qualitative basis, which fits perfectly within the unbiased, exchange model.
What are the specific benefits for the sell side, and for the buy side?
I’ll break this down into two components, direct access and then BIDS Trader sponsored access, because there are different benefits for both.
For direct access, the sell side connects to an anonymous pool that’s focused on institutional-sized executions, and whether they access BIDS through their algorithms or DMA, they get quality executions. This may have a positive effect on their transaction cost analysis (“TCA”), which in turn may improve their position on algo wheels, their buy-side’s panels, as well as strengthening their client relationships.
For the buy side, direct access gives them an opportunity to access unique or innovative liquidity with little to no execution slippage. We will cover off on the nature of conditional messages and how they work soon, but conditional messages provide buy-sides and sell-sides with access to larger in size liquidity without any opportunity cost in terms of execution when they’re used.
What is the sponsoring access model and why is it important?
This is unique to BIDS. We provide the BIDS Trader GUI to dealers at buy-sides. The system connects to their trading system, and they tell us which participants they want to use as sponsors. Essentially what that means is they will have relationships with certain brokers that for a variety of reasons they need to pay and BIDS Trader allows them to manage their commission dollars granularly with these brokers by selecting them from a drop-down at the point of execution. The broker not only gets the commission associated with that transaction, but they also receive the market share printed on Cboe Australia.
What’s important about conditional messages?
BIDS invented these in the late-2000s, as a way of providing large-in-scale executions without impacting execution performance. Conditionals messages are really representations of underlying orders that are mirrored into the BIDS dark pool. If you submitted a conditional message into BIDS and if there was contra liquidity in BIDS, your conditional could be converted to a firm order and execute against a similarly converted firm order. If however the contra conditional didn’t exist the broker algorithms would continue executing as they would normally with no execution opportunity cost.
What BIDS does from a conditional perspective is to turn latent, uncommitted liquidity, waiting to be executed, into active liquidity by mirroring it into its pool without committing it. Before BIDS, before conditionals, this liquidity was not doing anything, but with BIDS it becomes actively engaged and can be executed in size, vastly improving execution performance.
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