ANALYSIS: Eurex weighs liquidity scheme extension to stock options

Speaking at a media event in London on Monday, Robbert Booij said the liquidity program introduced for Euro Stoxx 50 index options this summer has helped develop that market.

“While the overall numbers show a cyclical challenge in the equity index segment due to dampened volatility across the European market, if you drill a little bit deeper there are positive trends within the complex,” Booij (pictured) told FOW at the sidelines of the event in London. “The STOXX 600 is growing strongly and developing as a European benchmark that closely reflects the Eurozone capital market.

“Equity options have seen almost double-digit growth this year and that has been supported by a change to our liquidity provider program that rewards what we call passive execution in the model.”

Eurex parent company Deutsche Boerse last week reported a 3% year-on-year increase in third quarter revenue, to €1.44 billion (£1.27bn). In a results presentation, the group said headwinds in equity derivatives drove financial derivatives revenues down 2% year-on-year in the third quarter to €280 million.

More recently, the Frankfurt-based exchange group reported last month a 22% increase in its Euro STOXX 50 index options (OESX) volumes to 22.2 million lots, according to FOW Data.

Recent performance has been buoyed by the liquidity program that came into effect on July 1, designed to support the order book by offering incentives to cover all expiries of OESX within the first two years, according to a March circular. The scheme also included what the exchange calls a “passive volume incentive” that rewards liquidity providers based on execution against their quotes and resting order in the order book.

“What we are hearing so far from buy side firms is that the product is becoming much more attractive for end customers - to the extent that at times the spreads that we have in the most liquid Euro Stoxx series are more narrow than the equivalent at-the-money S&P 500 index strikes,” Booij added. “That also helps us look more into other types of end customers as well, so that’s a wider universe of funds and asset managers and potentially retail accounts.

“Now that we have this program in place, we can also look to extend that into single stock options as well, which would be a natural next step.”

Eurex has also been on a mission to increase coverage in European single stock derivatives. Among a host of listings this week, the exchange launched 14 mini versions of options on industrial and luxury retail companies. The move is part of a wider push to encourage retail trading in Europe, a key strategic aim for the group.

“From a single stock options perspective, we have a market share of over 60% in terms of coverage across the European names,” Booij said. “Through our key benchmark providers – STOXX, MSCI and FTSE - we also cover global benchmark indices which gives us the ability to service an increasingly global client base. We believe that we are the right exchange for retail brokers to partner with to get access to that coverage, so we are actively working on expanding that network.”

The exchange is also working on its first quantitative investment strategy (QIS) index futures, slated for last month but delayed due to the US government shutdown.

“Having the full ecosystem available on a single platform reflects the growth in sophistication that we have seen across the equities space,” Matthias Graulich, global head of products and markets, said in an interview. “We have moved from simple index derivatives to a push to differentiate and create alpha – that means more granular baskets and QIS strategies for example.

“So for us that means more flexibility on what we are offering ... and at the end it is a combination of different underlyings, derivatives and exchange-traded funds (ETFs) to enhance and develop our offerings to meet that demand.”

Eurex also has incentives in place for the daily options launched in August 2023, in a bid to replicate the US boom in same day options.

“What we are seeing so far this year is volumes up 35% year-on-year, and for the whole year we expect around 10 million contracts to be traded,” Booij said. “What we are working on very hard is to activate more end customer flow to trade these products.

“So we have a temporary fee waiver in place which is nearly a 40% reduction in the agency fees, and we are setting up sales efforts and marketing to boost adoption further.”

The segment is expected to benefit from the European Union’s Savings and Investment Union (SIU) plan to increase retail participation in the region’s capital market.

“It is important to note that this is not just a product for retail – the flow we have seen is largely coming from institutional clients such as insurance companies looking to hedge a specific exposure,” he added. “As far as retail goes, I think the SIU push to free up some of the €10 trillion held in deposits into options will help fill the gap we see with the US market structure so far.”

Eurex last month saw 756,333 same day Euro Stoxx 50 index options trade, 39% up on October 2024, according to data published by the exchange.

Overall, the equity expansions will help the exchange offer increased margin and capital savings as volatility returns to the market, Graulich added.

“From an efficiency perspective, the ability to trade and clear all of that in the same place means really meaningful margin savings for the client – and adding more products only compounds that margin saving effect,” he said.