Liffe to launch time pro-rata algorithm for STIR futures

Euronext’s derivatives business Liffe has developed a new trade matching algorithm for its short term interest rate (STIR) futures contracts, which will include a time element in the allocation process.

The new time pro-rata algorithm will allocate volume to resting orders by considering the timing of resting orders as well as their size. The larger the resting order, the greater the share of the allocation, and the earlier the resting order was placed in the market, the greater the share of the allocation against a matching incoming order.

"At the moment, we use a plain pro-rata algorithm which allocates volume to resting orders purely on the basis of how much volume you have relative to everyone else. This has caused people to put larger and larger orders in to include their fill even if they don’t need that amount," said Amanda Sutworth, director of fixe-income at Liffe. "The introduction of a time element into the algorithm should improve the market-place because there’s an incentive to be there first. It will maximise participation, stabilise the market place and should give a greater distribution across the market-place."

She added: "From a price-taker point of view, the algorithm will add stability and reliability to the order book because there will be less volume switching in and out quickly than with the current pure volume algorithm. Overall it should add to the size of the market, which will increase confidence that you’ll get the fill."

Over the past four months, Liffe has consulted its members about the proposed algorithm, and has said it received an overwhelming approval. The new algorithm will be implemented for three-month sterling futures in August, and for three-month euro (Euribor) futures and three-month Swiss (Euroswiss) futures in September.