Close this search box.

A new way forward: driving innovation in European equity derivatives – The TRADE News

US and European options markets have experienced contrasting fortunes over the past decade. As shown in this chart, US index options volumes have surged while European activity has flatlined. Although value-traded in the two regions were comparable in 2009, European index options value-traded at the end of 2019 amounted to ~13% of the US total.

 This divergence is the result of the overall outperformance of the underlying US equity indices versus those in Europe, as well as differences in the market structure between the two regions. The European listed equity derivatives market is fragmented along national lines, with limited competition outside single stock futures and options, which has stunted its growth. 

Against this backdrop, there has been increasing interest among market participants for a new European futures and options exchange which takes a modern, innovative, truly pan-European approach and facilitates access to both US-style on-screen liquidity and off-exchange block transactions. This would complement the existing market structure, bring much-needed competition to Europe’s derivatives landscape and use a technology-driven approach to create a deeper, more liquid market by aggregating different types of client demand.

Enhanced on-screen liquidity in particular would help attract new sources of order flow to Europe from those US participants accustomed to trading listed options in their home market, as well as European clients that value an electronic on-screen model, thereby creating trading opportunities for both new and existing participants and benefitting the market overall.

A new way forward

To that end, Cboe has announced its intention to launch a new equity derivatives exchange, called Cboe Europe Derivatives (CEDX), on 6 September 2021, subject to regulatory approvals, bringing competition and innovation to the region’s equity index futures and options markets.

CEDX will form part of Cboe NL, Cboe’s Amsterdam-based exchange, and aims to bring a modern, vibrant, lit pan-European venue to the region’s derivatives markets through the creation of a single marketplace for participants to express views on a broad spectrum of futures and options on European country and pan-European indices. These products will clear into Cboe’s pan-European clearing house, EuroCCP, creating a market structure that will generate efficiencies at both the trading and clearing level.

“Our goal is to help grow Europe’s equity derivatives market overall by leveraging Cboe’s global derivatives expertise, European equities footprint, and world-class technology,” said Ade Cordell, president of Cboe NL. “We believe we can attract new participants to European markets, in particular US-based quantitative and volatility trading funds, creating a new, enlarged liquidity pool to help grow the equity and index options volumes in Europe.” 

In order to foster growth of its platform, Cboe has brought on several firms as launch partners to help to provide the exchange with client-driven order flow. One such partner is Goldman Sachs, who continues to heavily invest in its own trading technology and the provision of liquidity to clients. 

“As global leaders in the listed and over the counter derivatives markets, we see the benefits for our clients in supporting efforts that drive competition and innovation,” said Elizabeth Martin, global head of equities electronic trading at Goldman Sachs. “Partnering with Cboe Europe Derivatives, and their unique focus on solutions for all market participants, aligns with our efforts to drive growth and innovation in listed derivatives markets.”

CEDX will initially offer trading in futures and options based on six Cboe Europe Indices: the Cboe Eurozone 50; Cboe UK 100; Cboe Netherlands 25; Cboe Switzerland 20; Cboe Germany 30; and Cboe France 40. These are proprietary Cboe indices all constructed using Cboe Europe market data, utilising the same methodology and ground rules as one another, meaning that, for example, the methodology for the Cboe Germany 30 index is the same as the Cboe France 40 index. Having this consistency/uniformity of index construction is important to market participants as it ensures they do not have to decipher multiple sets of index ground rules to understand how the indices are constructed.

Furthermore, from a futures and options contract design standpoint, Cboe is ensuring that its European derivative contracts encompass the feedback that participants have relayed, including right-sized index contracts for the Cboe Germany 30 index futures and options contracts with appropriately calibrated tick sizes.

Additional equity index and equity derivative products will be phased in over time, including single stock derivatives. Volatility products similar to the VIX for the European market could also be on the horizon for CEDX. 

Partnering with the Industry on Innovation

Client demand has been strong with increasing interest from dealers in CEDX’s new order book model. Ultimately, technology and market evolution is to the benefit of the end investor, as we have seen in the European equity markets which have undergone a significant amount of changes over recent years, increasing the amount of competition and advances in trading mechanisms. The support for CEDX’s new market model from a wide range of market participants is a sign of the appetite for an enhanced European equity derivatives market that benefits all participants.

Cboe’s Cordell added: “We have had an extremely positive response to our vision for Cboe Europe Derivatives from participants across the trading community. These firms are excited by the prospect of a transparent, efficient, lit pan-European equity derivatives market, which will help to unlock its true potential and grow the market overall.”