How Accessible is Off-Book On-Exchange Trading?
The difference between good execution and best execution
First published in TabbFORUM
By Anantya Bhatnagar, Quantitative Analyst, BMLL
European market structure is complex and fragmented, with multiple order types, trading mechanisms and execution venues. Beyond trading on visible limit order books, dark pools and OTC, market participants can trade in a host of different ways, such as via conditional orders, periodic auctions or on a systematic internalizer. Given this fragmentation, it is important for market participants to understand what liquidity is actually addressable in order to efficiently trade, achieve best execution and manage risk appropriately.
A category of trades that has seen increased discussion due to its growing market share is ‘Off-Book On-Exchange’ trades. These are OTC trades that are executed away from an order book, but are reported to an exchange and traded under exchange rules. An important question is - what proportion of this liquidity is accessible to any market participant? In this article, we use BMLL historical data to answer this question.
We begin by quantifying the extent of the rise of traded notional in the Off-Book On-Exchange category across all European equities.
We observe in Figure 1 that between January 2023 and December 2024, the market share of this classification of trades has nearly doubled, from 13% to 23% (+77%). A stark contrast can be made against the trend seen in lit continuous volume; over the same period, the share of the latter was reduced from 29% to 24% (-17%). In absolute terms, Off-Book On-Exchange monthly notional rose from 249 bn EUR to 374 bn EUR (+50%), whereas lit continuous notional decreased from 556 bn EUR to 392 bn EUR (-29%).
Is this phenomenon equally distributed across Europe or are there certain markets that are especially noteworthy? Figure 2 splits the volume in this category by primary listing market; while UK equities represent a significant percentage (20-25%), the increase seems to have been driven by French- (+81%), German- (+70%), and Dutch-listed (+68%) equities. In total, these markets account for 40-45% of Off Book On Exchange notional.
Whilst daily aggregated volumes provide one picture of Off-Book On-Exchange trading, looking at intraday volumes provides further insights. In Figure 3, we review the average intraday distribution of Off-Book On-Exchange trades by publication time. This helps us to understand whether participants are trading and reporting these trades during the main lit continuous trading hours or whether they are happening after market close, offering a possible reason for why these transactions may be more bilateral in nature. It can be observed that 54% of trades (by EUR notional) occur within an hour after the market closes.
Figure 4 captures a different view of this data by showing the proportion of trades and the time delay between the actual trade being executed and published on market data feeds. Trade publication deferrals can happen for a number of different reasons and long publication time delays are indicative of non-addressable volume. This liquidity transacted on a bilateral basis would not have been accessible to general market participants (e.g. trade reports on netted trades being one example).
Measuring by trade count and average notional traded, it can be observed that most trades are published by the reporting venue within 10 seconds of the actual execution. This means that there is no significant delay and trades are reported close to prevailing market conditions i.e., the trade-reported price should not be significantly away from the market price at publication time.
How much of this bilaterally traded volume is truly accessible by any market participant?
To answer this, we reference MMT (Market Model Typology) flags and specifically the Price Formation indicator (MMT level 3.8) for each reported trade. In Figure 5, we recreate the data points from Figure 1, this time excluding trades reported with the NPFT (Non-Price Forming Trade) or TNCP (Trade not Contributing to the Price Discovery Process) flags. We see immediately that there has not been an increase in market share as Figure 1 implies; between January 2023 and December 2024, the Off-Book On-Exchange market share of addressable trades has stayed flat at 7%. Moreover, the split between price-forming and non-price forming trades in this classification has reduced significantly, from 40/60 to 24/76 over the same time period.
Addressable Off-Book On-Exchange volumes have not grown when compared to non-addressable volumes
The insight this provides is quite simple and yet profound - whilst at a high level, Off-Book On-Exchange market share may appear to have grown substantially in tandem with a decline in lit trading, examining more granular detailed historical data provides a clearer picture. Addressable Off-Book On-Exchange volumes have not grown at all, compared to non-addressable volumes. Understanding these details will help any trading practitioner to better strategise and optimise access to liquidity.
The ability to optimise liquidity strategies
Understanding the proportion of true addressable liquidity is one of the most significant challenges for market participants, especially in a fragmented market like Europe. Using high quality historical data, and leveraging the MMT condition codes accompanying each individual trade, is essential to gaining a deep understanding of market microstructure. Using the right tools to monitor changes to the liquidity landscape lead to timely, actionable insights. Applied to liquidity seeking strategies, these can make the difference between good execution and best execution.