The London Stock Exchange Group took on May 31 another big
step in its plan to expand its equity derivatives suite by
launching weekly options on the FTSE 100, the first weeklies
on the British blue-chip standard.
The weeklies went live backed by market-maker SIG
Susquehanna, one of the world’s top liquidity
providers, as well as a swathe of institutional and retail
The LSE said the launch was a response to client demand
for a London-based product as weekly options have in recent
years become a popular hedging tool in the US where they have
established themselves as an alternative to the standard
monthly options contracts.
Massimo Butti, head of business development at LSE
Derivatives Market, said: "The introduction of weekly options
on the FTSE 100 index is an absolute first for this index and
part of the strategic plan to offer a broader suite of
derivatives products listed on the LSE. No other exchange is
offering FTSE products offers weeklies."
The weekly option contract is the first that follows the
FTSE 100, the main British index, and taps into latent demand
for a new way of trading volatility on the FTSE benchmark,
"The launch is in response to client demand and reflects a
cooperative effort with some of our members. Liquidity
providers had approached us with a compelling business case
in support of the launch the weekly options on the FTSE
He added: "The result at launch is the commitment of one
market-maker and two hedge funds to trade the product. Sell
side institutions have also been active in promoting this
product before launch and some of the largest names in the
industry will offer it to their clients from day one."
Butti and his team are keen to increase the number of
market-makers on the product, mindful of the fact that these
liquidity providers can be crucial to the success of new
He said: "In addition, we are talking with another
market-making firm who would like to be involved in the
market and there are others that are standing by, waiting to
see how liquidity builds. For market-makers, there will be an
incentive scheme that makes it free to trade and offers a
share of revenue."
The LSE prefers to incentivise trading partners by
offering them a revenue share on new ventures rather than
rebates, which is typical from some other large exchange
Butti added: "Weekly options are an interesting product.
They have specific characteristics not available in
longer-dated options. Because they are introduced every week,
they have very small time value and therefore small premium.
They are more reactive to changes in the market prices and
volatility and are therefore a convenient way of buying
protection as well as taking advantage of events, expected or
unexpected, with more precision."
The head of business development at the LSE derivatives
market said the contracts are also attractive because they
are priced some 30% lower than established rival products
taking into account execution and clearing fees.
Butti said: "We have also introduced a £500 trade
fee cap for on screen and off screen transactions."
He added: "Counterparties trading on or off-exchange and
clearing with LCH can also benefit from cross-margining
weekly options against other FTSE derivatives cleared through
The contract is also interesting to the LSE because it has
proved elsewhere popular among retail investors and
He said: "The weekly options product appeals to a
wide-range of users and where the product has become
established it is widely traded by both institutional and
retail investors. The volume on the FTSE MIB weekly options
listed on our Italian market for example, is about 30% retail
and 70% institutional. In the US, the split on the S&P
weekly option is about 50-50 retail and institutional."
"We have engaged with the retail brokers and some of them
will be live from day one. Others will be watching to see how
liquidity builds," Butti added.
Weekly options are an interesting product. They have specific characteristics not available in longer-dated options.
The weekly is part of a bigger push by the LSE to
stimulate trading in derivatives based on the FTSE 100.
Butti said: "There is a real opportunity here. If you look
at the ratio of notional trading against the underlying,
trading on the FTSE 100 is lower than the FTSE MIB or the
DAX. If you look over the past six years, the ratio between
notional volume and cash on the FTSE 100 has barely
increased, whereas the FTSE MIB or the EuroStoxx have grown
steadily. With that in mind, there is a significant prospect
of extracting value in the FTSE 100."
And the LSE is already looking at other opportunities for
weeklies, according to Butti.
"In terms of extending the format, we will see how the
current weekly option develops, but we could look to develop
the weekly option to single stock options. It is possibly not
relevant for all, but it could work for the most liquid
The LSE has modest expectations of trading in the early
days. "In the first weeks, the market-makers will first need
to find their feet. People have to get familiar and
comfortable with the product. It will likely be a slow burn,"
But the group’s ambition is clear. "We are
focused on growth in the market as a whole. In the US,
weeklies account for 30-50% of the total options index
volume, whereas in Europe the number is 8-10%. There is
definitely room to grow," said Butti.
About the London Stock Exchange Derivatives Market
London Stock Exchange Derivatives Markets, launched in 2013, offers member firms new and innovative products, alongside a leading international marketplace for Russian Depositary Receipts, Index and Dividend derivatives. It also operates a linked order book model with Oslo Børs to offer primary market Norwegian liquidity as well as trading of futures and options on the FTSE 100 Index and other UK stocks. In 2015, Turkish equity index derivatives products on the BIST 30 Index, Turkey’s leading index, were also made available to trade.
London Stock Exchange Derivatives Market
Telephone: + 44(0) 20 7382 7650