Passive Liquidity Protection (PLP)
Passive Liquidity Protection (PLP) is a market mechanism that can further improve the order book’s liquidity picture and price discovery process. Market participants providing passive liquidity need to spend significant resources preventing adverse hits due to short-term underlying movements in products where underlying or exogenous markets significantly drive price discovery. As a result, they may refrain from quoting in the order book and only provide liquidity off-book. By differentiating latency in selected option markets, we let market participants focus on serving the needs of the end clients and grow the market as a whole.
PLP was first introduced in all FX futures and options, followed by a pilot phase for the German and French equity options in June 2019. The DAX® index option (ODAX) added PLP as the first index option in August 2020, including its weekly contracts, followed by all remaining equity options. After encouraging results, Eurex activated PLP for the FTSE 100 index option (OTUK) in May 2021. Since October 2022, PLP is activated also in the EURO STOXX 50® index option family.
- Benefits
- Activated Products
- Functioning
- Latest videos
- Improved liquidity. Attractive order book – all market participants benefit from the order book’s improved liquidity picture and price discovery process in products where underlying or exogenous markets influence price discovery.
- Level playing field. Fairer competition - liquidity providers can focus on providing liquidity and serving the end investor instead of competing on technology.
- Preventing latency arbitrage - trading participants active in the order book suffer less from trades that only target outdated liquidity.
- More competition. Better prices - PLP stimulates price competition among trading participants and lowers the entry barrier for new market entrants.
- More market depth. Tighter spreads - a significant share of the overall quoted volume available in the order book moves closer to the best price level and strengthens the top of the order book. Offered bid-ask spreads tighten.
- Increased trading sizes - market participants benefit from increased size available at the top of the order book.
PLP is active in the following products:
- FX futures and options
- All equity options
- All index options, excluding:
- Eurex Daily Futures on KOSPI 200 Options (OKS2)
With PLP activated, 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 model allows Eurex to help all participants who have placed a resting order by allowing them 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 or future products. PLP is therefore providing additional value in options and selected futures strongly depending on reference price signals.
Passive Liquidity Protection – ensuring a level playing field
Jonas Ullmann, Member of the Executive Board and Chief Operating Officer at Eurex, explains the major benefits and successes of Passive Liquidity Protection (PLP) and what is next in terms of functionality.
