Bid Only and Virtual Offer Price (VOP)
Bid-Only indicates a trading situation where the Liquidity Provider (LP) exposes their position only on the bid side (buy) within the order book. In other words, the Liquidity Provider positions themselves solely for purchasing instruments and does not offer to sell new ones. When this situation is intentionally created by the Liquidity Provider, trading of the instrument is not suspended but continues as usual.
To ensure compliance with the market requirement that mandates the execution of a contract within the bid and offer quotes of the LP, and in the absence of the offer quote in this case, the Market automatically calculates a Virtual Offer Price (VOP).
What is the Virtual Offer Price?
The VOP is a virtual offer price and is used to establish an upper limit for contract execution based on the bid quote exposed by the LP. The VOP is calculated in real-time and updated whenever the Liquidity Provider updates their bid (buy) quote in the order book. For more details on how the VOP is calculated, please refer to the Guide of Parameters.
Why is a Virtual Offer Price calculated?
The Request For Execution (RFE) market model aims to provide a high level of investor protection. Investors can only trade with each other in the order book within the bid and offer quotes displayed by the Liquidity Provider (LP). This mechanism ensures that an investor does not trade at a worse price than what is shown by the LP.
In a Bid-Only situation, the LP exposes their position only on the bid (buy) side. The Virtual Offer Price calculated by the Market provides the maximum limit at which a contract can be concluded.
Any attempt to trade above the VOP will result in an automatic 30-second suspension of the order book. During this suspension period, orders that have the potential to match with each other but fall outside the limit represented by the VOP are not cancelled. Instead, the system periodically attempts to match them at 30-second intervals.
The automatic suspension of the order book does not prevent investors from trading the instrument. If there is a possible new match within the range between Bid-Only and VOP, such a contract will be concluded at the end of the automatic book suspension period.
How does the Virtual Offer Price provide protection?
Consider the following order book for a Bid-Only instrument, where the Liquidity Provider has a bid (buy) quote at €0.45, and the VOP has been calculated (Bid +0.1 for the range: 0.3≤b<0.75) at €0.55:
Investitor |
Quantity |
Bid Price |
Offer Price |
Quantity |
Investitor |
LP |
50.000 |
€0,45 |
€0,55 |
|
VOP |
In this situation, an investor can sell the instrument to the LP at €0.45 or trade with another investor at any price between €0.45 and €0.55.
Let's assume that Investor A submits a sell order for 7,800 instruments at €0.67. The order book will display:
Investitor |
Quantity |
Bid Price |
Offer Price |
Quantity |
Investitor |
LP |
50.000 |
€0,45 |
€0,55 |
|
VOP |
|
|
|
€0,67 |
7.800 |
A |
Subsequently, let's assume that a new Investor B submits a market order to buy 4,000 instruments. Without any investor protection mechanism, Investor B's order would match with Investor A's order. Investor B would end up buying 4,000 instruments at €0.67, which is 49% higher than the LP's bid quote (€0.45).
Thanks to the RFE market model and the VOP, this contract between Investors A and B is inhibited because it occurs above the VOP of €0.55. The order book is temporarily suspended and will display:
Investitor |
Quantity |
Bid Price |
Offer Price |
Quantity |
Investitor |
B |
4.000 |
Market |
€0,55 |
|
VOP |
LP |
50.000 |
€0,45 |
€0,67 |
7.800 |
A |
How can I sell an instrument that is in Bid-Only if the order book has been suspended due to a potential match above the Virtual Offer Price?
If the order book for a Bid-Only instrument has been suspended to prevent a trade above the VOP, it is still possible to sell this instrument. However, it is important to understand how and at what price.
Suppose we have the following order book, and it has been automatically suspended to inhibit a trade between the orders of Investors A and B at a price higher than the VOP:
Investitor |
Quantity |
Bid Price |
Offer Price |
Quantity |
Investitor |
B |
4.000 |
Market |
€0,55 |
|
VOP |
LP |
50.000 |
€0,45 |
€0,67 |
7.800 |
A |
As previously explained, during a Bid-Only situation, it is possible to trade at any price within the Liquidity Provider's bid (buy) quote and the VOP.
If Investor C wants to sell their 3,500 instruments, they can do so at a maximum of €0.55 (the VOP). Let's assume that Investor C then submits a sell order for 3,500 instruments with a limit of €0.55. The order book will display:
Investitor |
Quantity |
Bid Price |
Offer Price |
Quantity |
Investitor |
B |
4.000 |
Market |
€0,55 |
3.500 |
C |
LP |
50.000 |
€0,45 |
€0,55 |
|
VOP |
|
|
|
€0,67 |
7.800 |
A |
At the end of the 30-second suspension period of the order book, the Market's matching mechanism will reassess the updated book situation and determine if there is a potential match within the range between the Liquidity Provider's bid (buy) quote and the VOP.
In our example, such a match is now possible. Investor B and Investor C's orders match for 3,500 instruments at €0.55. The updated new book will display:
Investitor |
Quantity |
Bid Price |
Offer Price |
Quantity |
Investitor |
B |
500 |
Market |
€0,55 |
|
VOP |
LP |
50.000 |
€0,45 |
€0,67 |
7.800 |
A |
To prevent the matching of the remaining 500 instruments from Investor B's buy order in the market with Investor A's sell order at 0.67 euros (above the VOP), the order book is suspended again after the transaction between Investors B and C. This suspension process will be iterated continuously as long as this situation persists in the order book.