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Transatlantic Exchanges, Brokers Put Their Money on European Options Growth
December 17, 2007
Several newly transatlantic exchanges have big plans in 2008 to more closely link their options markets, betting in part that Europeans will become as enamored of options contracts as their retail investor counterparts across the pond, who have driven that U.S. market's growth.
"We feel there's huge potential for development of the equity derivatives market in Europe, particularly by bringing current over-the-counter activity to the exchange and developing the flow coming from buy-side and retail investors," said Philippe Hajali, director of equity derivatives at Euronext.liffe, an NYSE Euronext subsidiary that comprises derivatives markets in Amsterdam, Brussels, London, Lisbon and Paris. "We think there is the potential to double or triple equity derivative volumes in Europe."
Of the recent cross-Atlantic merger activity, NYSE Euronext, the combination of NYSE Group and Euronext that was finalized in April, is furthest ahead in its integration efforts, and its goals extend well beyond options. Deutsche Borse more specifically targeted the options market in its agreement in May to purchase the International Securities Exchange (ISE) and connect it with its Eurex derivatives exchange.
Nasdaq too is on the cross-border options radar screen, with a complex deal to acquire OMX that involves obtaining Borse Dubai's shares of the Nordic exchange operator. Borse Dubai's bid had not been approved at press time, and Nasdaq declined to discuss exchange-integration plans.
NYSE Euronext is already seeking to accommodate large member firms by collocating their servers in the same facility as the Euronext.liffe trading engine to reduce data latency, a necessity for algorithmic trading. "We're going to provide 100 megabit pipes and people can be collocated in the same room as the Liffe trading engine to speed up trading." Hajali said. "So far, we have received over 80 applications for these new connectivity solutions, and over 20 of these applications are for collocation, which will go live early in 2008."
The exchange expects significant growth in 2008 stemming from algorithmic trading, especially from U.S. investors, said Hajali, adding that large "hedge funds and the big Chicago-based algo trading companies" are actively trading Euronext.liffe-listed contracts.
Ultimately, however, the goal is to reach beyond the biggest players, and there is already, substantial interest among European investors in the U.S. options market. Bruce Goldberg, chief marketing officer of ISE, said that 15 percent or more of U.S. options volume originates in Europe, executed via Wall Street trading desks or electronic accounts provided by mostly U.S. brokerages such as Greenwich, Conn.-based Interactive Brokers and, more recently, Chicago's optionsXpress.
Deutsche Borse's Big Bet
"A merger between ISE and Eurex will create an improved distribution system, to make various products on one exchange available to the other's clients," Goldberg said.
ISE, which typically ranks first or second in trading volume among the six U.S. options exchanges, may prove to be an enticing draw. Douglas Atkin, CEO of Majestic Research in New York, called that acquisition the "biggest bet" on growth in European options trading. "ISE had huge market share in the U.S. and that provides the ability to move share overseas," Atkin said.
Goldberg noted that a merger isn't required to create links and, in fact, ISE has discussed partnerships with other exchanges around the globe. That such links have yet to occur, however, highlights the complexities, which include the technical challenges of connecting exchanges as well as regulatory and cultural hurdles.