Insights & Analysis

Cboe forges ahead with new European exchange

4th November, 2020|Luke Jeffs

Derivatives
Asset Management

Cboe has filed to open an Amsterdam-based exchange with the Dutch regulator and enabled clients to start testing the new market’s functionality

US exchange Cboe Global Markets is forging ahead with its new European futures and options exchange slated for launch in the first half of next year.

Most recently, Cboe, which has European offices in London and Amsterdam, has filed its application to open an Amsterdam-based derivatives exchange with the Dutch regulator and enabled prospective clients to start testing the new market’s functionality.

Ade Cordell, the president of Cboe NL, the group's Dutch equities exchange that will be home to Cboe Europe Derivatives, said he and his team are working on various fronts.

“On the exchange side, we’ve put our submission in to the AFM. The process is they viewed that documentation, and then we had a meeting with them, where they had some questions and now the formal process has started where they pose more questions and we go through the approval process.”

In parallel, Cboe is talking to its prospective clients, namely hedge funds and market-makers.

Cordell said: “Part of the conversation with the market-makers will be: “What are the incentives for connecting to your venue?” So those conversations are ongoing and ultimately, we would need to put those in front of the regulator.”

He added: “We have an idea of what we would like the market-makers to do in terms of tight two-way prices, in terms of size and time in the market etc, so we want to say to them this is what we would like from you and these are the incentive schemes. But we don’t want to put something in front of them that doesn’t make sense so we think the right way to do that is to go on this journey with them.”

The US exchange said Cboe NL derivatives testing started as scheduled last month and that effort will step-up at the start of next year, when full “end-to-end testing” is made available.

Cordell said he has been busy, engaged in detailed talks with prospective clients, trying to understand their specific requirements.

“When we speak to a customer, we go through the value proposition then we ask them a series of questions. So, if it’s a market-maker, we would ask who clears your business, do you have any third-party relationships, with software vendors or anyone else?”

He added: “Some ISVs (Independent Software Vendors) have already heard from market-makers or other clients, and have already been on the phone to us, saying they have been told by their client that they want to connect to our venue so what do they need to do?”

Cordell, who ran equity derivatives at Intercontinental Exchange before joining Cboe at the start of this year, said he and his team are taking their message to other key ISVs.

“This involves selling the value proposition to them also because some of them have a broad set of clients so we want them to feel engaged and feel this is something they want to take out to their clients.”

Cboe Europe Derivatives wants to bring something new to Europe – a transparent futures and options market that appeals to hedge funds that are big derivatives traders in the US.

Cordell said: “If you think about the business plan we have put together, there is a demand from systematic and quantitative funds in the US and their European arms for a disruptor with a largely order book driven model. These funds say to us: “Could you realistically do this given the market-makers in this space are very active on the incumbent venues?” so you are going to have to convince them that this is worth them doing.”

The European options market is shared by London's ICE Futures Europe, Frankfurt's Eurex, part of Deutsche Boerse, and Euronext Amsterdam.

Cordell said the response from the hedge funds and market-makers has been “very positive” and he wants to work closely with these firms to define with them the market’s specific features.

“The next stage is how do we get them all together and design the micro-structure of how this going to work. We have established a market-maker working group which met for the first time in September and we have another in November so I want to keep this going on a monthly basis.”

Cboe, which runs the largest US options market, believes there is huge, unfulfilled potential in the European derivatives market that can be tapped by its new, transparent market.  

Cordell said the US and European options markets have fared very differently over the past decade.

The Cboe NL president said: “You might ask: “What has gone wrong given both markets were roughly the same size in 2009?” Ten years later, the US has ballooned and Europe has remained static and has even started to trend down. There has got to be something we can do about that?”

Cordell said: “There must be some untapped business that we can bring to Europe and that explains our engagement with the systematic funds.”