Europes single stock futures and options markets
have been traditionally dominated by local exchanges, but as
competition increases, the landscape could be set to change
across the continent, writes Jonathan
Europes single stock futures and options markets have
been traditionally local - if investors want to trade German
equity derivatives they go to Eurex, for the UK NYSE Liffe has
been the go-to and in Italy, participants use Borsa Italiana
and so on.
Other national venues in Warsaw, Spain and NYSE
Euronext in the Netherlands have also had the lions share
of domestic volumes without having to fend off competition.
Compared to the US which has liberalised its market
structure and has 12 exchanges, we have pretty much one for
each market and a couple of initiatives, says
global head of connectivity, SunGard's capital markets
But for the market to grow it cannot stay within national
boundaries. These places have almost a monopoly on their
So the future has to be around competition so that you
can trade one against the other, get competitive pricing from
different venues and then you can get market makers and traders
coming in and exploring the multi-listing
As the equity derivatives space continues to grow, however,
this future could soon become a reality. Incumbents are looking
to increase their reach into neighbouring European markets,
while smaller trading platforms are starting up to rival larger
exchanges, sparking a new wave of competition.
Eurex lists the most actively traded European contracts,
with volumes of 9.8m across single stock futures and options
contracts in November. With a firm foothold in its local
market, the German exchange is now looking to grow its market
share in other continental equity options and single stock
Brendan Bradley, head of innovation management at Eurex,
says the exchange strategy is to move towards a pan-European
offering, highlighting how the bourse has almost doubled its
market share in French equity options.
That really is an indication that we have had
liquidity on the screen and there has been a shift of liquidity
from the off-screen players and I imagine that some of them are
looking to benefit from cross-margin benefits on Eurex,
On the Dutch side, we have seen [local MTF] TOM doing
well and I thought our percentage market share would go down
but it has gone up slightly. In the Spanish and the Italian
markets, we continue to see an increase in business and we have
seen our share rise above about 10% on both now.
Bradley says Eurex also has a foothold in the Austrian
markets. With the Austrian derivatives exchange
effectively closing down we already had a share of about 85-90%
but now we will have the ability to take on the index license
there as well.
| We know there is some appetite
for change in the markets," Nicolas
Betrand, head of equity and derivatives markets at
In London, Liffe holds a similar position to Eurexs in
Germany, with volumes topping 6.6m during November. And the
exchange has been adding contracts in recent months, including
the much sought-after Royal Mail stock futures.
But now a new rival has emerged to challenge Liffes
dominance, in the form of the recently restructured London
Stock Exchange Derivatives Market.
LSE acquired the remaining 51% of Turquoise in September and
now operates it as a Recognised Investment Exchange rather than
an MTF as it was previously categorised.
At present, its equity derivatives products in London have
only gained a fractional market share but the exchange has
plans to expand its portfolio after gaining more freedom to
launch new products since acquiring a 100% stake in
We are starting a venue owned fully by the London
Stock Exchange Group and our plan is to leverage the
most valuable assets of the exchange in terms of our presence
on the core equity markets in London, said Nicolas
Bertrand, head of equity and derivatives markets at LSE
Since acquiring Turquoise and mapping out its plans for the
derivatives market, LSE has set its sights on growing its
Any product that you provide in the market needs to be
liquid enough to gather interest and that is where by analysing
specifically the UK equity derivatives space we believe there
are some significant improvements we can bring to the
market. added Bertrand.
We know there is some appetite for change in the
markets. We are not going for a splash; we are thinking about
the market and going step-by-step.
Across the Atlantic, the US equity options market operates
around a single clearing house, the Options Clearing
Corporation, which has placed 12 exchanges in a shoot-out for
market share across the country.
It would be much nicer, simpler and much
more cost efficient to have a single clearing house
across Europe but I dont think any of us believe in
Carré, global head of connectivity,
Opening up a single clearing pool in one clearing house
would increase competition for execution venues, as is the case
in the US. But with the number of clearing houses currently
operating in Europe, it is unlikely that CME, ICE or Eurex
would ever agree to this.
Opinions may be divided on whether this model will be
replicated in Europe, but the truth is the continent is far
from a shift to a single clearing house.
It would be much nicer, simpler and much more cost
efficient to have a single clearing house across Europe but I
dont think any of us believe in Santa Claus
anymore, added Carré.
We all know this is not anywhere close to happening
In the Netherlands, one platform championing the idea of a
single clearing house model is multilateral trading facility,
The Order Machine (TOM).
Headed by CEO Willem Meijer, the platform says it has built
a 30% market share in Dutch equity options against incumbent
exchange NYSE Euronext, which previously dominated the Dutch
If you have it like the OCC model in the US, then you
will get real competition between exchanges and it helps
investors because the trades can be cleared through different
exchanges in the same pool and that is beneficial for the
market, says Meijer. It will be good for the
TOM set its sights on an ambitious
40% market share earlier this year, and Meijer did not stop
there, adding the MTF is also looking outside of the
There are two ways to do this. Find a country where a
company like [TOM shareholder] BinkBank owns or holds all the
retail flow and team up with them in a joint venture in that
particular country, that is a very long term route and I
dont see that happening within the next year.
The other way is to offer liquid products traded both
by retail and institutional investors, such as large series on
equity options or liquid stocks which options are written on. I
see that happening next year and we are going to look at every
country in Europe and take an interest in stock that is
attractive for investors to trade on, says Meijer.
TOMs challenge to Euronexts established presence
in the Netherlands is a sign of the growing competition within
Europes equity options market. Along with LSEs
attempts in the UK and Eurexs expansion throughout the
continent, individual national exchanges dominance over
their domestic market is coming under threat.
The landscape of the market could also set to be changed if
the proposed financial transactions tax comes into force in the
11 European Union countries supporting the levy.
While market participants have been lobbying against the
0.01% charge on derivatives transactions from the outset, the
European Commission looks committed to taxation on financial
The tax has already been rolled out in Italy, which could
explain why Eurexs volumes have risen in Italian
The lack of consistency across Europe could prompt some trading
activity to exit FTT countries.
Its a burden to liquidity and a step back in the
markets, says Meijer. It has to be implemented in
every country in Europe or people will escape to FTT-neutral
territories where the flow will end up and we will lose it to
Dont expect that if FTT is introduced in
Netherlands or Germany that the business will reluctantly stay
here and pay the tax. The business will flow to the mechanism
where the tax is avoided.
The European market for equities has been fiercely
competitive since Mifid I and the proliferation of trading
platforms across the continent. And with Bats-Chi X, the most
successful market that emerged from Mifid, is expected to move
into derivatives in Europe imminently (although this has been
the expectation for some time), more execution venues will seek
to emulate the success of TOM, possible aided by a
pro-competitive mandate in Mifid II.
Another consideration will be the strategy of Euronext
following its separation from NYSE Liffe. It will need to fight
back and meet the challenge it faces across multiple markets
for the local equity derivative markets. 2014 is shaping up to
be another year of shifting liquidity in the equity derivatives