Milan’s Idem market was the talk of the town at
June’s International Derivatives Expo in London.
"Idem had a sensational month," as John Damgard, head of the
Futures Industry Association, put it in his conference
Xavier Rolet, the former Lehman Brothers banker and now
chief executive of LSE Group, called Idem (pictured)
in his keynote address "a unique platform, designed to meet the
needs of institutional investors, market makers, and retail
A quick look at the Italian Derivatives Exchange
Market’s monthly figures (see chart
below) shows what all the fuss is about. May
2010’s total of just over 9m contracts traded
smashed all previous records, up more than 60% on April
2009’s then-record 5.5m and virtually treble the
monthly average for the past few years.
OK, May was a freak, marked by volatility on global markets
and high derivatives volumes the world over. In June,
Idem’s volume fell back to 5.8m contracts. But
that was still more than any other previous month.
The exchange’s core products are single stock
futures and options. But while the options volume is reasonably
steady, futures trading fluctuates wildly, with a strong
seasonal pattern, peaking in April-May-June and
Thus, the main reason why May’s trading total
of 9.06m contracts exceeded April’s 3.67m figure
by 5.39m contracts was a 350% swelling of single stock futures
volume. That category put on 4.37m extra trades in May
– 81% of the total growth.
A diverse community
Idem lists 15 stock futures and 44 options, mainly on stocks
in the FTSE Mib Index of Milan’s 40 most traded
stocks, as well as some leading midcaps. Some 60%-70% of
trading is in a handful of contracts, however, and the
bourse’s big market makers provide nearly all the
But ask market participants what’s driving the
sudden boom, and the answer is clear: diversity. By which they
mean a healthy interaction between retail investors, hedge
funds, asset managers and brokers. Though the whole user base
is not huge, its composition is balanced, and could be seen as
"[Idem] is a very regionalised market," says Fabio De Zordo,
UniCredit’s managing director of equity
derivatives flow in Western Europe. "It’s one of
the best when it’s a bull market, and one of the
worst when it’s bearish. Italians only like it
when things are buoyant."
Not many exchanges can lay claim to a trading pit on the
site of an ancient Roman theatre. And the Italian love of
communality endures, in spite of the pit being reduced to the
status of a spectacular museum. "We all know each other,"
laughs De Zordo.
Much of this close pool of talent was honed at the nearby
Università Commerciale Luigi Bocconi, he says, one of
Europe’s most respected business schools, just a
tram ride away.
Another talking shop and promoter of innovation is the
Associazione Italiana Certificati e Prodotti di Investimento,
the investor forum populated by many former Idem floor
"In Italy, during the last two years, the banking landscape
has changed and we have seen some consolidation of the banks,"
says Gabriele Villa, head of private investors business
development at Borsa Italiana. "We have seven or eight big
banks operating on the market, and maybe 50 or 60 very small
"It’s quite a small community. During the
crisis, quite a few disappeared," agrees De Zordo. "OTC
[volumes] decreased a lot with the crisis – now we
prefer to cross everything. Italian investors prefer Italian
markets and Italian underlyings. It’s quite an
Insular, perhaps, but this small group of equity derivatives
traders is surprisingly diverse, and has driven and sustained
the bourse over its 16 year lifespan. No wonder smaller
investors – brokers and their private retail customers
– are so highly prized and cultivated by the
"Our value added is that we can provide the same level of
service to big and small clients," says Villa.
"In Italy, in general, there is a large interest in
derivatives," says Nils-Robert Persson, chairman of Cinnober,
the Swedish exchange systems company which has worked with Idem
for several years. "My impression is that the Italian brokers
and banks are happier to trade on exchange than the rest of
Europe. The market share of exchange-traded instruments versus
OTC is greater in Italy than it is in the rest of Europe."
"I think Italians have a good appetite for risk," agrees a
trader at one of Idem’s market making banks. "But
we are also large buyers of Italian bonds. The main reason
equity derivatives are popular here is because they are easy
and cheap to trade."
Idem’s pricing structure for equity derivatives
aims to please large and small players alike. Under a scheme
introduced last year, primary market makers receive hefty
discounts of up to 80% for block trades in stock futures and
options – an incentive that has eaten into the
bourse’s trading fee income.
But smaller players get a look-in, too. Proprietary traders,
institutional and retail brokerages now pay a maximum of
€1.80 for trading and clearing on a trade of up to 25
"We are the only exchange, in Europe for sure, offering this
type of incentive for a small-sized stock futures business,"
says Villa proudly.
While it is hard to estimate, sources suggest retail
investors account for as much as 15% of the
exchange’s trading volume. Mostly they trade
single stock futures and Mini-FTSE Mib Futures – stock
option and index traders tend to be institutional investors. A
dozen online brokers help private clients to trade direct,
while five to 10 proprietary trading firms offer arcade-style
access to remote professionals.
And Milan’s traders are keen to point out how
the Italian model bests those of some EU neighbours. "I think
the key problem for the UK is stamp duty," one says when asked
why retail futures trading is more popular here. "In Italy, we
don’t have stamp duty – we still
don’t understand why you do."
A stamp duty reserve tax of 0.5% is payable in the UK on all
sales of shares or options.
But despite the market’s attractions and
advantages, Italy’s private derivatives traders
are a select bunch. "We’re not talking about a
large group of people," says Villa. "Our research indicates
that there are around 10,000-15,000 retail investors in Italy.
It’s a very concentrated market. On Mini-Mib
Futures, their activity is quite important, even more than 40%
A good part of this retail trading is arbitrage trading
programme strategies, in which investors trade indices and
stock futures simultaneously. The situation is similar in the
Spanish, French and German retail markets, though the cost in
Germany is somewhat higher.
Smaller investors are also closely shielded by the
country’s market regulator, the Commissione
Nazionale per le Società e la Borsa, says De Zordo. "We
are probably one of the most closely regulated markets in
Europe. There are lots of controls on prices on Borsa Italiana,
lots of checks on price consistency. But this means it is less
dangerous for the retail investor."
Perhaps the real value of so much retail activity on the
market is the persistent liquidity it supplies. "The liquidity
they generate is amazing, compared to high frequency trading,"
says one market source. "When you look at a [trading] book made
by HFT, its very stop-start." In other words, the liquidity can
disappear as quickly as it appears – as global
investors discovered to their cost on May 6. "When something
goes wrong, the book will be empty."
Looking for new ideas
Product development is another lever in Idem’s
effort to keep the punters satisfied. In April, it introduced
futures on the FTSE Mib Dividend Index, responding to strong
demand from institutional investors.
Unlike futures on some blue chip Italian stocks, this
contract’s liquidity is less likely to be stolen
by Eurex and Liffe, since the main market makers are Italian
hedge funds and pension funds. Some of them rely on regular
dividend payments from their large equity holdings, and so need
to hedge the risk of big companies not coughing up.
Though the dividend futures have yet to gain traction, Idem
expects trading to be busiest around March to May and September
to November – the dividend seasons.
What else would the market like to see? "It would be good to
have the Vix [volatility index] of other marketplaces," says a
trader at one local bank. "They do it in the US, so why not
here? Trading volatility is very general here. Even people who
don’t trade VStoxx use it to watch the market,
both people in retail and those with big equity
Eurex’s VStoxx Futures track the implied
volatility of the Euro Stoxx 50 Index.
"The use of derivatives by asset managers will also
increase," De Zordo believes. "There has been legislation to
allow this. If [Italy has] a recovery, we will see the return
of huge, huge flows – Italians love a boom!"
And it seems Borsa Italiana has had a reputation for being
innovative, going back to before the LSE takeover –
right down to the minutiae of market data packaging.
"We got a request five years ago to develop a new market
data system for the Borsa Italiana," explains Persson at
Cinnober. "I admit that we at the time didn’t
consider a market data system as the most challenging area to
develop. So we were actually a little bit suspicious, until we
understood what they would like to do. Borsa had an idea, and
in fact they were the first to do it in a commercial way, to
not only feed out their own market data, but also to sell it in
The result is the highly flexible, bit-by-bit saleable DDM
Plus system, which has been copied by exchanges across Europe
trying to diversify their revenue streams.
"Its value is that it’s very flexible and
configurable – you can a have a snapshot view [of your
book] any time," says one market player. "For ordinary retail
[investors], it’s fantastic. You’re
receiving a very, very frequent snapshot of the market."
"Borsa Italiana is a fantastic
exchange, because they are so efficient in their own testing,"
continues Persson. "They are sophisticated. They are operating
a large exchange much more efficiently than most similar
exchanges. They’re very cost-efficient. Borsa
Italiana are very happy customers. Nowadays, their volumes on
average are five times as high as their peak value was five
"We have done two upgrades for them [this year]. One was based
on the fact that their volume was so high, so they needed a
hardware upgrade. The other factor is that they’re
now switching from the Click system to the Sola system."
The LSE Group’s move to a new trading platform,
TMX Group’s Sola, looks finally to be kickstarting
synergies between the London and Milan exchanges, three years
after the takeover was completed.
Synergies are one thing – taking on
Europe’s two dominant derivatives exchanges, Eurex
and Liffe, is another.
Rolet caused a stir at IDX when he used his keynote speech
to voice what he called "modest ambitions", but which some at
the event scoffed at as wildly over-ambitious.
LSE’s plan, Rolet said, was "to offer a
credible alternative to established European derivative
exchanges within the next nine months." Details were scant, but
the main idea seemed to be offering a range of pan-European
single stock futures. (See interview with
LSE’s Nicolas Bertrand, published
But is the idea "more of a wish than a business plan", as
NYSE Liffe’s global head of derivatives, Garry
Jones, suggested afterwards? What does Villa think?
"It’s something we had to do to start to create
real synergies between EDX and Idem," he acknowledges. "We
started working with EDX in 2007, but currently we have
different products and different platforms. After the
migration, we will have a single trading platform with the same
functionality, the same bandwidth requirements,
Only then, Villa insists, can the Group make a start on
Rolet’s dream of competing with Eurex and Liffe.
At the moment, for instance, Italian investors wishing to trade
EDX’s Nordic stock options have to pay for two
exchange memberships, in spite of moves to lower these
"At the moment it’s not easy for our clients to
trade EDX products, and vice versa," says Villa. "After the
migration, we can look to creating greater synergies between
the two markets and developing our product range
Clearing house waits to hear strategy
There have even been suggestions that Borsa
Italiana’s clearing house, Cassa di Compensazione
e Garanzia, will be offered alongside LCH.Clearnet as an
alternative clearer once the platform merger is complete.
"As you can imagine, the LSE is now very interested in
post-trade. They’re moving to develop it in
Europe," says Federico Sguera, a business development official
at CC&G. "We can [offer] our expertise, but we
don’t know how they will proceed."
So could a combined platform really hope to compete with
Liffe and its Bclear platform, whose May volumes for equity
derivatives totalled 72.5m, and Eurex (just over 100m)?
"This is a big question," says one market player, weighing
his words carefully. "Probably, Xavier was a little bit
ambitious [in his speech]. But the idea is there. Look at Idem.
Idem was a very successful local market, but with the ability
to get volume from foreign clients in Europe on Italian
Adding EDX’s cross-border client base to
Idem’s wide-reaching appeal will make the two
exchanges greater than the sum of their parts – or so
it is hoped.
Whether this can be achieved in the nine months promised by
Rolet remains to be seen. "He has a lot of things to deliver
now," as one seasoned European market player puts it.
"We’ve had a lot of talk for the last 12 months;
now it’s time to deliver."