Refinitiv uses rebates and speed to drive Matching liquidity

LSEG arm takes carrot-and-stick approach to market-making on primary venue


Refinitiv has launched a market-making rebate scheme that it hopes will boost trading volume on its Matching and Pricestream venues. The financial markets data and infrastructure arm of the London Stock Exchange Group will reduce the amount that brokerage dealers need to pay if they reach a certain level of market-making.

Users of the Matching central limit order book – one of two primary venues for trading spot currencies, along with EBS Market – will also need to ensure that market-making accounts for at least 25% of their overall trading activity if they are to benefit from its five-millisecond feed. Users that fail to meet this threshold will be moved to the slower data feed of 50 milliseconds.

The scheme, which has been in operation since January, will run until the end of 2023 and could be extended depending on client feedback.

It is among a series of changes Refinitiv has rolled out in recent months to encourage greater participation from market-makers. In May, it launched a market-taking rebate scheme for smaller banks. It has also changed the minimum quote life for nine of its most traded currency pairs.

“The idea of a primary market in foreign exchange is well accepted by the market,” says Neill Penney, group head of FX at LSEG. “The market finds it valuable to have a place to go, but the existing mechanics, liquidity and pricing weren’t working for the market. And so people were drifting away in terms of where they traded.

“By incentivising them in the right way via improvements in liquidity profile in the book, setting up a volume baseline, and having people more actively manage where they sent their volume, we felt we could be successful in returning some volume. And putting financial incentives against that helps everything kind of align.”

No such thing as a free hunch

The move came after a newly formed internal analytics team uncovered operational inefficiencies in Matching that were causing market-makers to go elsewhere for trading and price discovery.

Among the team’s findings was that some market participants were taking advantage of the high-frequency data produced by the platform’s market-making community without actually contributing to the data themselves.

To improve the liquidity in the book, targets were implemented for market-making versus market-taking and users were given three months to ensure that their execution algorithms were in line with the new rules.

“If you want access to our fastest binary feed, you actually have to contribute your fair share of prices into the system,” Penney says. “We knew there’d be some customers for whom this didn’t work for their business model. But our hypothesis was that most people will look at the ratio and then they’ll know how to get there.”

According to Penney, the change appears to be gaining momentum. He says 28 of the top 50 currency dealer banks and non-bank liquidity providers have already signed up to take advantage of the faster market data and reduced trading costs; and that about 20% of the participants that were using the faster feed prior to the launch of the rebate scheme have since been moved to the slower feed or have changed their strategies.

“Where there’s a clear imbalance in outcomes in favour of somebody never participating passively, they shouldn’t access the best data,” says Geoff Jones, director of FX spot venues at LSEG. “It’s not trying to normalise outcomes but there shouldn’t be an opportunity to freeload on data in the venue.”

Access to faster data can be particularly advantageous for client-facing businesses. These market-makers can give customers prices based on the most up-to-date market data and avoid losses on trades with clients when markets are moving quickly.

If a market-maker trades beyond a given threshold on Matching, it receives a rebate for the fees it pays on trades beyond that threshold.

For example, if a market maker has a threshold of $10 billion of trading a month, and pays an average of $3 for every $1 million to trade, but trades $12 billion passively, Refinitiv would rebate the firm’s $2 billion of trading at $3 per $1 million. Should that same maker trade $20 billion a month, their market making would essentially be free. In April, one liquidity provider was able to trade for free, according to Refinitiv.

Small fortunes

A separate market-taker rebate structure for tier two banks is also in place. These banks are predominantly liquidity takers via relationship trading and do not process the kind of volumes that would allow them to join Matching’s market-making rebate scheme. However, they do trade some of their volume on the book, on which they can now receive a discount if they are willing to take a certain amount of liquidity through FXall’s Pricestream venue.

While the market-making rebate programme on Matching essentially sets technical parameters on how the biggest market participants trade, the taker incentive seeks to reward the smaller players for the amount of business they bring to the venue.

Jones does not expect these smaller players to be market-makers on Matching. However, he says Refinitiv has also launched a market-taking scheme in which users can receive material discounts on their matching brokerage as a result of trading as a price taker.

“It allows that community of banks that can’t participate in this making scheme to trade more with the market-making banks who are engaged as makers in our market-making scheme and fill that gap,” he says. “So, it becomes a complete ecosystem. Both market-making banks and market-taking banks have an incentive to trade within our environment.”

Refinitiv data shows that since the market-making programme was launched, liquidity providers that have signed up have increased their volume when compared with non-participants. In March, growth among participants was three times higher than the overall growth on Matching, at a time when volatile markets helped to lift average daily volumes by 10% compared with the previous month.

To maintain a liquid book on Matching, Refinitiv has also changed the minimum quote life for the major currency pairs to enhance price discovery and balance the needs of the market-makers and -takers that use the venue. The firm plans to make further changes in July, when it is expected to bring a number of the liquid crosses – such as the sterling- and euro-Australian dollar pairs – down from 50 or 100 milliseconds to 25 milliseconds.

“If you want to be a source of price discovery, the prices have to be somewhat stable,” says Penney. “If they flash in and out, it’s not a source of price discovery. The prices have to be stable enough [to be used] for price discovery, but not so stable and long-term that people can’t make prices and make a profit out of it because the prices kind of stick around long after they’ve ceased to be valid.”

LSEG completed its $27 billion acquisition of Refinitiv in January 2021. Shortly afterwards, it announced plans to migrate Matching and FXall on to the technology powering its stock exchange so that the trading venues’ capabilities could have the same speed and capacity as modern equity markets.

The group invested £1 billion ($1.41 billion) last year as it continued to integrate Refinitiv into its business. Penney says the changes currently being made reflect LSEG’s commitment to FX markets as it seeks to forge new partnerships with its clients.

“We were unable to do a two-year scheme before,” Penney says. “What we’ve been able to do now with our new ownership under LSEG is to think win-win and think strategic. I think there’ll be more of these schemes. It’s really good that we’ve been able to pull all these pieces together into a scheme like this that’s generating value for [our customers], improving the book for the industry, and ultimately helping us be more successful as a venue.”

Update, June 9, 2022: This story has been updated to give more details around the market maker rebate scheme.

Editing by Daniel Blackburn

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