Out of my bid and ask

The market in AEX index options on Euronext has always been a competitive battleground. Not in the same league as the Eurostoxx options, but still tight spreads and liquid markets. No wonder the exchange is defending it by raising legal barriers of entry for TOM.

In the meantime, there’s something wrong in the AEX for a few weeks now. Several market makers noticed a steep increase in losing trades on their quotes. One market maker suggests a new competitor in the pit with faster systems and lower latency is able to arbitrage less sophisticated traders. “In normal circumstances every liquidity provider was fast enough, now everyone is getting afraid to quote at all“.

Another trader points to Euronext. Given their track record with trading technology that doesn’t sound unlikely. Last week the all trading in the index was halted for few hours.

Both of them confirm the liquidity in the index options is declining, especially in the Daily options. “Even with the slightest move in the future, we’re getting arbitraged – doesn’t make sense for us to quote high delta strikes“. Reported problems are going on for three weeks now. Checked today, only five out of eight market makers keep their quotes in the market in the daily options.

A bigger fish in the market or an old-fashioned exchange? I would place my bets on the second guess.