With Passive Liquidity Protection (PLP), Eurex aims to further improve the liquidity picture and price discovery process of the order book where price discovery is significantly driven by underlying or exogenous markets. In such specific products, market participants providing passive liquidity to the order book need to spend a high amount of resources to prevent adverse hits in case of short-term underlying movements. As a result, they may even refrain from quoting in the order book and only provide liquidity off-book. By differentiating latency in selected option markets, we ensure that market participants can strengthen their focus on serving the needs of the end-clients and grow the market as a whole.
Passive Liquidity Protection was launched for German and French equity options in June 2019. Following the successful pilot, PLP was expanded to all equity and DAX index options in August 2020. Eurex will evaluate the overall effects on market liquidity and continue its member consultations for potential further steps in 2021.
PLP enhances the liquidity picture of the order book by further contributing to a level playing field:
With the activation of PLP, all aggressive orders, meaning orders that are executable upon arrival at the matching engine, will be delayed by a product segment-specific deferral time before they can interact with the order book. Participants will be informed in their private response messages whether their corresponding order has been deferred. Non-aggressive orders, meaning orders that are not executable upon entry, also denoted as passive orders, will directly impact the order book without deferral.
The new model allows Eurex to help all participants who have placed a resting order by giving them additional time to react to price changes in related/underlying markets. This is especially important in the more complex options markets where price formation is closely linked to the underlying. PLP is therefore only providing additional value in options and selected futures strongly depending on a reference market (e.g. FX).
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