Europe’s equity derivatives market has historically been dominated by national exchanges each of which have primarily focused on their domestic market, requiring participants to connect to multiple exchanges and clearing houses to achieve pan-European coverage.
Cboe Europe Derivatives (CEDX), which launched in 2021, has taken a different approach with the aim of lowering the barriers to entry for firms wishing to trade European derivatives and reverse a decade or so of stagnant volumes in European products compared to those in other developed markets.
Through one exchange and clearing house, CEDX offers a single access point to pan-European products, helping to reduce operating costs and improve capital margin efficiencies. Furthermore, it is promoting the adoption of more screen-based liquidity to attract new participants, particularly systematic firms, who have been deterred by the predominance of OTC style/off-screen trading in European options.
CEDX launched with a range of futures and options on Cboe Europe single country and pan-European equity indices. It expanded its product universe in November 2023 to include pan-European single stock options with the support of leading participants including ABN AMRO Clearing, All Options, Barak Market Making B.V., Goldman Sachs, Morgan Stanley and Susquehanna International Securities. In addition, Interactive Brokers has also committed to connecting to CEDX to provide its clients with access to the suite of pan-European equity derivatives offered by the exchange, including single stock products.
To continue its growth momentum, CEDX is collaborating with IPC on multiple fronts to deliver further and greater efficiencies with respect to efficient market access.
So, what does this mean in practice? We asked Iouri Saroukhanov, Head of European Derivatives at Cboe Europe, and John Owens, Director Global Exchange Relations at IPC to elaborate on their industry collaboration.
What trends are CEDX seeing in the European equity derivatives market?
The overwhelming trend in European derivatives markets over the past decade has been its poor performance compared to other major markets in terms of volumes and liquidity. Despite having similar levels of GDP, volumes in US options markets have surged over the last decade while those in Europe have remained flat. This creates problems for participants and end investors and undermines the overall health of European capital markets.
We believe the reasons for Europe’s weak growth in derivatives are the fragmented nature of its market structure, predominance of off-screen trading and inability to attract retail investors in the same way as other markets. These factors have all contributed to an environment of high operating costs and weak capital and margin efficiencies. New entrants – particularly those accustomed to highly liquid options markets in the US and retail investors – have been deterred from coming to Europe.
It is against this backdrop that CEDX came to fruition, drawing on Cboe’s leadership position and expertise in US derivatives, our world-class technology and ownership of the largest pan-European stock exchange and most-connected CCP. These factors have allowed Cboe to create a truly unique proposition for European equity derivatives in the form of CEDX.
How is CEDX intending to improve market structure for European derivatives?
At the centre of CEDX’s value proposition is its pan-European eco-system – in terms of trading, clearing, and market data – that simplifies access to and dramatically reduces costs for those wishing to access European derivatives products. This removes the need for market participants to connect to multiple domestic venues and clearers, streamlining operations and reducing complexities.
At the same time, CEDX is promoting deep and liquid on-screen markets, ensuring fairer access and greater transparency to different types of investors. Finally, all products are designed with customer needs top of mind, with consistencies in their design and rulesets. This is particularly important for CEDX’s index derivatives, which are all based on Cboe Europe indices and have a consistent base methodology.
The importance of this community to creating a vibrant, healthy and diversified marketplace should not be underestimated and their participation has helped drive derivatives volumes in the US to record levels this year – particularly in shorter-dated index options. As one of the largest retail brokers, Interactive Broker’s decision to connect to CEDX is a strong endorsement of our strategy to attract new participants through a simpler, more efficient model and we are in active discussions with similar brokers of this type.
How does the collaboration between IPC/CEDX support more efficient access for market participants to Europe’s equity derivatives markets?
IPC’s overarching focus and commitment is to continuously enhance connectivity and communication in global financial markets. In collaboration with exchanges including CEDX, other trading venues and data services, IPC creates and builds solutions and services that enhance the trading experience of a ‘connected’ global trading network of more than 200,000 market participants in 70+ countries.
IPC’s partnership with CEDX is focused on a specific exchange strategy aimed at enhancing market access and user connectivity through data centre colocation and associated services. The collaboration strengthens market participants’ ability to navigate through – and capitalise on – the opportunities presented by the European equity derivatives markets.
By co-locating at the Equinix LD4 data centre, CEDX benefits from faster member and user onboarding, which in turn supports smoother and quicker trading operations. At the same time, IPC’s financial trading network ‘connections’ benefit from much more efficient access to CEDX for trading and market data connectivity.
How is CEDX’s new single stock options offering differentiated from other exchanges?
CEDX expanded into single stock option products in early November, offering options on companies from 11 European countries (Belgium, Denmark, Finland, France, Germany, the Netherlands, Norway, Spain, Sweden, Switzerland and the UK). These products amount to around 70% of current ADV and open interest for the top 600 European equity options. CEDX plans to broaden the available universe of underlying stocks in Q1 2024 by including additional 200 names, subject to regulatory approvals.
As with our existing products, CEDX’s value proposition for equity options is based on offering a single access point to pan-European products and promotion of on-screen liquidity. Furthermore, CEDX offers unrivalled benefits from a post-trade perspective through Cboe Clear Europe, CEDX’s clearing provider and one of the largest pan-European cash equities CCPs. Cboe Clear Europe expanded its services to support the exchange’s single stock options launch and is offering significant capital efficiencies to participants by operating a single, pan-European margin pool, with offsets immediately available between CEDX’s index and single stock products. For single stock options clearing, the use of underlying stocks as collateral will provide offsets against matched equity option positions, delivering a potential initial margin reduction for a covered call position of around 70%, according to our initial estimates. Furthermore, stock settlement (on options exercise and assignment) will take place in domestic CSDs, removing unnecessary costs and allowing for settlement netting with relevant cash equities transactions.
In summary, what are the biggest benefits to market participants from the IPC/CEDX collaboration?
This is a huge ‘win-win’ for all financial markets participants seeking effective access to pan-European derivatives markets. IPC’s network connectivity infrastructure supports much faster onboarding to CEDX via co-location at the Equinix Data Centre. At the same time, CEDX has enhanced visibility within IPC’s global trading network of 200,000+ participants. All benefit from an efficient, fully managed, ‘network as a service’ model and IPC’s high performance, low latency, high resilience connectivity solutions.