In a recent Acuiti report, a fifth of market participants expect to see a contraction in European listed equity derivatives over the next five years.
The report, titled ‘Optimising European Listed Derivatives Market Structure’, surveyed senior executives and trading heads active in European and US listed derivatives markets across hedge fund and proprietary trading markets. It was released in partnership with Cboe Europe Derivatives.
Acuiti stated that “declining volumes in the European listed options market over the past decade [have] been a notable trend” in a strong global market. Survey participants cited a lack of retail participation and fragmented options markets in Europe as the primary causes for this, with the costs of trading in Europe and the appeal of alternative products following in importance.
“These factors, particularly the cost and fragmentation of markets, impact the cultivation of retail participation, but more importantly stifle institutional liquidity,” the report commented.
More than half (62%) stated that fragmented European market structure and related capital inefficiencies have impacted their trading strategies in European options, and 50% stated that they had allocated more to other regions as a result. However, close to 40% reported that this has had no impact on their trading strategies.
Managing connectivity and market updates from different exchanges was selected as a “critical challenge” by more than a quarter of participants, while paying multiple sets of market data fees to different exchanges was labelled as a “significant challenge” by almost half of those surveyed.
Participants added that wider spreads associated with European options were impacting price, with 88% agreeing that US options were either significantly or somewhat cheaper. The cost of trading in Europe has risen, for the most part, as a result of market data fees paid to exchanges, the report found, with more than 90% reporting that they have seen an increase or a considerable increase in this space.
Slow European growth has primarily been due to a lack of market structure innovation, the market not taking the need for competition seriously and providing inadequate support, and insufficient market maker support, causing weak prices on screens.
When it came to improving European performance, the report stated that on-screen exchange trading would improve Europe’s attractiveness to external flow sources such as the US and APAC. However, 71% of market participants commented that although they would prefer to execute options trades on-screen they were hindered by the prevalence of liquidity in OTC markets.
“On-screen trading is key to further developing risk management capabilities in European markets,” the report concluded. “There will need to be a concerted effort from across the market to support [this].“
Additionally, more work needs to be put towards attracting retail participation, Acuiti affirmed. “As the number of European retail investors that make their own investing decisions continues to grow, it’s important that retail investors have access to exchange-traded derivatives for their own risk management purposes.”
The report commented that Europe has the opportunity to innovate beyond what is seen in the US options market, advocating for open access to CCPs and for European CCPs to engage in cross-margin agreements at other CCPs.
“Reforms to market structure to boost volumes in Europe would foster greater competition but also benefit incumbents as a more vibrant and faster growing market is forged,” the report finished.
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