Request for Execution (RFE) model

In line with the Warrants and Certificates markets of the Euronext group, the Request for Execution (RFE) model has been introduced for the SeDeX and EuroTLX (Cert-X) markets.

The model requires the presence of a mandatory Liquidity Provider (LP) for each instrument. Every investor can trade a contract with either the Liquidity Provider, any additional parties if present (Secondary Liquidity Provider or Market Maker), or another investor. In all of these cases, the contract must be concluded exclusively within the bid-offer spread of the LP and only in the presence of the LP. Trading is automatically suspended if the LP is absent from the order book.

Now let's delve into the details of how the RFE model functions by examining the market behavior in the case of order matching, the three types of RFE available, and the key advantages offered by this model.

When an aggressive order potentially matches an existing one, the contract is not immediately concluded. Instead, execution is halted, and an RFE message is sent to the LP to allow them to update their quotes. After the update, or at the latest, when the maximum response period given to the LP expires, matching resumes with price-time priority. The RFE message does not contain any information about the counterparty, the trade direction, price, or quantity of the aggressive order.

For each individual traded instrument, the Liquidity Provider has the option to choose from three types of RFE:

• Disabled RFE: no Request for Execution message is sent to the LP, and the matching between the two orders is instantaneous. The LP is not allowed to update quotes;
• RFE 0.6 seconds: the Request for Execution message is sent to the LP as soon as a potential matching between two orders is detected. The LP has 0.6 seconds to update their quotes by sending new ones or confirming existing ones, or letting this time window expire without sending any updates;
• RFE 3 seconds: the Request for Execution message is sent to the LP as soon as a potential matching between two orders is detected. The LP has 3 seconds to update their quotes by sending new ones or confirming existing ones, or letting this time window expire without sending any updates. 

An early response from the LP before the RFE duration expires leads to the resumption of continuous trading.

During the RFE phase, any other orders entered within the time frame from the RFE message's dispatch to the LP's response or the RFE duration's expiration are also parked and will be executed or placed in the order book when the RFE phase is resolved. During this time, traders have the ability to enter, modify, and cancel orders, including the initial order that triggered the RFE mechanism.

The RFE mechanism allows the LP to reevaluate their prices by confirming, improving, or worsening them. In the first two cases, there is a definite contract execution (if the aggressive order has not been modified in the meantime), while in the third case, it must be assessed whether the worsened quotes still allow matching with the aggressive order or not. If not, both orders, the aggressive one that triggered the RFE mechanism and the new quote, enter the book without contract execution.

The details regarding the RFE chosen by the LP for each individual instrument are available at the Trading Group level. The Trading Group identifies a group of securities characterized by common factors, particularly the trading market, the issuer (only for the main ones), the trading hours, the RFE parameter, and the settlement system. Borsa Italiana provides details of the Trading Group for all SeDeX and Cert-X instruments through various sources: 

• Standing Data Optiq (file OptiqMDG_Production_CashStandingDataFile_WarrantsAndCertificates_YYYYMMDD) and (for subscribers to the service) extended Standing Data (file BRED_REFDATA_PLUS_SEDEX_YYYYMMDD)
• Notice of the start of trading (for new listings)
• On the Borsa Italiana website, within the product sheet for each individual instrument
• On the Live Euronext website, within the product sheet for each individual instrument.

The RFE model introduces significant advantages to trading, both from the perspective of the Liquidity Provider and investors. Thanks to the RFE mechanism:

• LPs are protected from latency arbitrage and do not need to reduce liquidity or widen their bid-ask spreads to address this condition
• Issuers are in the optimal position to expand their range of quoted products.
• LPs are in the ideal position to improve liquidity conditions by adjusting pricing quotes and exposing a more competitive bid-ask spread.