Equity option competition in Europe
This is a guest post by Cornelius Müller, who works for Eurex / Deutsche Börse. It appeared first on brokerdealer.nl. This isn’t an academic paper, as you may expect the author is a supporter of a certain derivatives exchange. Still, he has valid points, nice charts and a great overview of the European option competition between exchanges. A good read.
“Liquidity is sticky” is an often heard quote when competition between exchanges is discussed. So when TOM announced that they were taking on Euronext back in 2009 it was met with skepticism. Now in 2015 we see TOM at approximatively 30%. However, in his own column Willem Meijer, the CEO, claimed a 45% market share noting also that once Eurex reached a 50% market share competing for the Bund future, all remaining volume quickly followed. It looks like TOM is aiming for that magical 50%, hoping that history repeats. It’s perhaps also an explanation why they make a huge effort to polish the numbers, pushing the percentage as high as possible. The truth is however that TOM never reached a 45% market share and that the market share has been stagnant for the last couple of months.
TOM’s quick rise
MARKET SHARE IN DUTCH EQUITY OPTIONS
TOM was able to absorb their market share through a deal with Binckbank, the largest retail broker in the Netherlands. Binck was one of the co-founders and gave their clients a very simple choice; Dutch equity options would only be executed on the TOM platform and nowhere else. A bold but well executed plan and once the flow started coming in, others quickly joined. In extremely broad terms, Binck and their partners found a very creative and effective structure to internalize flow. This explains how TOM could eat away Euronext’s market share as published on their website, now at 41% of the total Dutch market. Now, you may wonder why you cannot find the 41% on this graph. TOM conveniently forgets to incorporate the Eurex volume, also a competitor in the Dutch equity option space with mostly institutional flow. Hence, the graph above takes into account all available data and might still not be correct as Euronext publishes larger figures on their volume than TOM gives them credit for.
What’s driving these changes in the Netherlands?
For the Dutch market, the answer seems to be easy, Euronext’s excessive fees were just not attractive for the active Dutch retail community. Also technical issues were probably coming into play when Euronext had some problems offering a stable platform. Eurex was also offering low fees, actually half of TOMs, but were never accessible to the Dutch retail community. The shift happened and TOM seems to stagnate now, probably having absorbed the quick wins. It still remains to be seen if others will follow suit despite Willem Meijers wishful thinking.
The larger picture
The FT wrote in 2012 about the stagnant European option markets in comparison to their US counterparts. This does not seem to be the case anymore looking at the various countries. The change is coming not only from TOM. The actual full European change is coming from one of the old pioneers of derivatives markets: Eurex.
Eurex challenges exchanges on their home turf
MARKET SHARE IN BELGIAN EQUITY OPTIONS
Looking at some graphs, we see some very interesting developments. The French market, once dominated by Euronext is now split into two with Eurex being slightly in the lead. The same trend for Belgium with both lines steadily going towards each other. This means that Euronext is being seriously challenged on three of their four option markets.
MARKET SHARE IN FRENCH EQUITY OPTIONS
MEFF and IDEM
The smaller option markets in Italy and Spain with overall volumes (Italy ca. 25Mio contracts and Spain with 33 Mio contracts) are experiencing a similar situation. For Italy, Eurex is creeping towards a 75 to 25 % split with IDEM and Spain is seeing a more volatile graph with a Eurex market share occasionally coming close to 40% for certain months.
MARKET SHARE IN SPANISH EQUITY OPTIONS
What’s behind these changes?
It’s not just a fee argument as Eurex had lower fees than the other market places for a long time already. There is something new that makes market participants turn to Eurex: The current environment requires higher capital efficiencies for many participants. Eurex has an integrated European options market and a silo based model of trading and clearing. That facilitates higher capital efficiency.
Netting of derivatives positions (and soon cash equities) across all country segments result in large margin efficiencies and leads to considerable savings for banks. The transition to portfolio based margining is increasingly applied by more and more clearers and should be fully completed by the end of this year. The opportunity to net within such a complete portfolio is something none of Eurex’s competitors can offer at the moment.
Another point is simple economic efficiency in infrastructure: If you are a new entrant like a US firm coming to Europe or a European firm seeking direct membership, and you want the biggest reach via one single exchange connection, there really is only one exchange to consider.
Again, “Liquidity is sticky”? Perhaps, but liquidity also tends to come together. The answer to getting towards the most cost efficient market for participants may not lie with exchange competition and diversification after all. The answer might not even lie with the traders themselves. It might just lie with concentration on a single platform once the banks, and their mid and back office realize the full scale of potential efficiencies.
(*all shown statistics are ex Bclear statistics. Bclear stopped reporting individual country market shares when ICE took over. Last reported market shares were on average: 0,5% for Belgium, 5% for France, 5% in the Netherlands 5,7% for Spain, 0,8% for Italy and 2,3% for Germany)
Cornelius Müller is responsible for institutional sales at Eurex Frankfurt for the Dutch, French and Belgian markets and is based in Paris.
In the other European countries (UK, Scandinavia) everything is still in the hands of one exchange?
And when comparing Euronext with TOM, one should take note the index option volume isn’t taken into account in the graph. And this volume is large, and more than 50% for TOM.
Well, For the Index Options: if you check on the TOM site it gives you a neat 50/50 split for 2015, and for may a slight advantage for Euronext.
Other option markets are still quite dominated by one exchange like Germany, UK is difficult to see: Eurex reported last in 2014 bouncing around 5-7%
costlier, old dinosaur is being hunted by cheaper nimble competitor, what’s new?
What’s new is that one of the nimble hunters, is a Dino himself . Eurex the T-rex
Congratulations on the detailed report! Though, in connecting this to the possibility of ‘high latency trading’ , there is an important nuance to add to this discussion. The modus (most common) size of a retail order in the TOM SOR is Euro 2,000,= . In principal in this case, latency arbitrage will only take place if an order on one exchange will create a price movement on an exchange where someone with a fast(er) connection to another exchange can react on earlier than others. A typical retail order sent to TOM SOR will be filled easily by the first bid or offer in the market on one of the connected exchanges and won’t move the market. The order sent as a « test »- trade in your analysis is more than a factor 100 compared to a normal retail trade in a very illiquid stock and therefor is not very representative to the retail space in the Netherlands. Although we closely monitor performance and also latencies in our systems and make adjustments accordingly if necessary, we feel that the order flow from retail sent to the SOR, is not negatively affected by latency arbitrage because of the nature of the flow.
Anything made in Germany is robust rock solid and good. Be it cars or exchanges.
Don’t put a hilgers spin on it
what’s wrong with faking it if it works, if you don’t like it, the door is to your right
http://video.cnbc.com/gallery/?video=3000390127
capital controls this weekend, huunh, i can totally see why their hedge fund business is going out of business
how much money are people making broking greece shares anyways, or is it one of their usual marketing gimmicks to grab some limelight
it’s quite special huunh
http://www.ft.com/fastft/349841/high-frequency-trader-optiver-pays-17m-settle-oil-manipulation-suit – 17m that’s not mals
“In extremely broad terms, Binck and their partners found a very creative and effective structure to internalize flow.”
how is that?
binck would route the retail flow on tom and optiver would warehouse it internally, duh?
@ 9:26
order books on TOM are open, most MM’s on EN are also on Tom
Dear TOM MTF Member,
Due to market circumstances and increased market volatility, TOM MTF has decided to delay the market opening until at least 09:10 hrs.
For further information please contact: services@tomgroup.eu
Kind regards,
TOM MTF
that was surprising
Dear TOM MTF Member,
Due to market circumstances and increased market volatility, TOM MTF has decided to expand the window for trade request review to 60 minutes for all TOM MTF Derivative classes as from market open 09:01 until further notice.
Dear TOM MTF Member,
Due to market circumstances and increased market volatility, TOM MTF has decided to expand the window for trade request review to 60 minutes for all TOM MTF Derivative classes as from market open 09:01 until further notice.
that was very surprising
Customers should be aware that:
Effective 01 October 2015, the Euronext Corporate Actions Portal will go-live and the legacy distribution channels will be decommissioned. Furthermore, as from this date, only duly licensed subscribers will have access to the Euronext Index Corporate Actions Calendars & Notices. Customers interested in continuing to have access to Euronext Index Corporate Actions Calendars & Notices and that have not yet contacted the Euronext Licensing Team are advised to do so before 01 September 2015 to avoid any disruption in the provision of the data.
Effective 01 September 2015, the provision of the data to entities that have not contacted our licensing team in order to enter into a license agreement will be discontinued.
The corporate action calendar isn’t very interesting. Can’t imagine this is a move against TOM.