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Transatlantic Exchanges, Brokers Put Their Money on European Options Growth
December 17, 2007
It also creates a regulatory dilemma for European options investors, who in the U.S. will face two sets of rules and two methods to calculate margin requirements.
"There will be huge pressure for the regulators to evolve," said Buhannic, adding that the issue in the U.S. is whether there should be two regulators, while Europe will focus on a different question: Can products continue to be cleared on a single platform, or should there be multiple clearing venues?
The biggest obstacle for the European options market may be changing the mind-set of investors, especially retail ones, who have typically invested conservatively and avoided the financial markets. European institutions already trade large volumes of derivatives, particularly options on non-equity products. On the equity-option front, Euronext.liffe, the largest of 11 European options exchanges, executed a daily average of 955,000 contracts in October--less than half the recent volumes transacted by the four largest U.S. options exchanges.
One reason the European options exchanges foresee significant growth is their efforts to attract activity now conducted over the counter. To that end, Euronext.liffe launched Bclear in 2005, giving institutions and brokers the ability to customize listed transactions and clear them more efficiently. "Since October 2005, 150 million contracts have been registered on Bclear," said Hajali, adding that he expects that growth to continue.
U.S. Brokerages Abroad
European retail investors are increasingly buying structured financial products that their financial services firms construct using OTC and listed derivatives. But they are also investing more in equities, a trend that is perking their interest in equity options, in part as a hedging tool.
It helps that some of the most successful U.S. brokerages specializing in options have set up shop in Europe. "We're committed to growing the business in Europe," said Rumi Kuli, EVP of international business development at optionsXpress.
The electronic brokerage has registered in Amsterdam, enabling it to offer trading accounts across much of Europe. Kuli said that beyond improving access to overseas markets, the increased efficiency and liquidity stemming from transatlantic exchanges will eventually lower costs for all investors.
One European broker questioned whether retail investors will see cost savings from the mergers, since they must trade through exchange-member brokerages that will have to pay additional reporting and clearing fees. He said that institutional customers may want to take advantage of NYSE Arca's rebate for posting liquidity, but costs involving compliance, risk monitoring and adding dedicated telecom lines to become a direct member of the exchanges may be prohibitive. "Firms may still prefer to go through an international clearing broker that offers low-cost, direct access to U.S. markets, without the added costs of being a direct member to U.S. exchanges," he said.
Greenwich, Conn.-based Interactive Brokers (IB) has catered to European retail investors since 1995. Gerald Perez, managing director in London, said IB is bullish on Europeans investing in options, partly because the structured products they're buying carry much wider spreads than listed options. Perez said IB, a pioneer in connecting to exchanges worldwide, has seen steady growth in options trading in Europe, particularly in the last few years.
Perez noted that educating European investors about the options market is key. In addition to IB's educational efforts, a number of firms that focus on such education--many of them from the U.S.--have opened in Europe.