Following its recent foray into global listings, the exchange is now switching its attention to growing its European derivatives exchange – with single stock options set to launch in Q4. BEST EXECUTION speaks to Cboe Europe president Natan Tiefenbrun and head of European derivatives Iouri Saroukhanov to learn more about “one of the biggest initiatives Cboe has undertaken in Europe for many years”.
“European derivatives markets are currently fragmented, with numerous national exchange and clearing silos each offering limited regional exposures,” explains Tiefenbrun. “This means multiple access points for exchange/clearing connectivity, order entry and data consumption for market participants to achieve pan-European derivatives product coverage/exposure.”
This can lead to complexities around differentiated market structures and rule books, which can cause challenges for market participants – while a lack of transparency alongside the existing OTC-style RFQ market means that on-screen liquidity is not always easy to achieve.
“This has limited participant diversity in European derivatives markets, inevitably leading to less price stability on screens, lower liquidity, and no growth in volumes,” says Tiefenbrun. “In contrast, in the US a large portion of the volume happens electronically, which is a much more transparent form of execution.”
In Europe, option markets volumes have plateaued since 2007 compared to the US, where stock options volumes reached a record 10.32 billion contracts in 2022 (an increase of 4.6% on the previous year) in comparison to a stark bear market for equities. In 2021, data from Options Clearing Corp showed growth soaring by a record 32.2%, while 2020 was also a record-breaking year.
Cboe currently accounts for around a third of the US options market volume (and around 48% of notional value, month to date), with Nasdaq the next biggest competitor at around 28% of volumes (around 24% of value) and NYSE and MIAX following.
In 2021, the exchange entered the European market with the creation of Cboe Europe Derivatives (CEDX), initially offering only index derivatives. On 6 November 2023 (subject to regulatory approval) CEDX will launch pan-European single stock options, cleared by Cboe Clear Europe.
“This is one of the biggest initiatives Cboe has undertaken in Europe for many years.”
“This is one of the biggest initiatives Cboe has undertaken in Europe for many years,” says Tiefenbrun. “CEDX’s aim is to grow the overall pie in European derivatives, by attracting new participants to the market, rather than simply taking market share from other exchanges.”
CEDX promotes its value proposition as a US-style on-screen market, specifically designed to attract participants into European derivatives, notably those that are already used to this type of market in the US. Its index products all comply with CFTC and SEC rules, which allow access for qualified US investors. From November, these will be joined by 133 equity options from 12 European countries, with additional products added in the second phase of roll-out, in early 2024.
Cboe sees its advantage in the space as coming from its single access point, with hundreds of equity options on one marketplace, alongside the significant post-trade efficiencies generated by Cboe Clear Europe, one of the region’s largest cash equities CCPs.
With the introduction of single stock options clearing, the use of underlying stocks to provide offsets against matched equity option positions will also be available, subject to regulatory approvals – equating to an estimated potential initial margin reduction for a covered call position of around 70%. Stock settlement (on options exercise and assignment) will take place in domestic CSDs, allowing for netting with relevant cash equities transactions.
The tariff structure for the new equity options is also to be kept simple, promising “lower trading and clearing fees compared to competing offerings”, while CEDX’s market data and connectivity fees will be waived until the end of 2024.
“With the introduction of single stock options, complex volatility strategies will be available to traders, removing hedging risk for participants with vol books,” concludes Saroukhanov, who joined Cboe Europe from Bloomberg in November 2022.
“Lowering barriers to entry, we believe that European volumes can finally start growing, ending the one and a half decades of stagnation.”
©Markets Media Europe 2023
