Competition in European equity derivatives markets is like London buses – you wait years for one to come and two come along at once… So it is with FTSE 100 futures and options which in the coming months will see two launches seeking to wrest liquidity from ICE Futures Europe’s current monopoly of the market.
On 29 March, Eurex will launch futures, options, total return index futures and dividend point index futures on the FTSE 100. CBOE is expected to go live with its “UK 100” contract as part of a suite of European equity derivatives indexes at the launch of its European market in Q2.
This month’s Acuiti Insight Survey, a monthly survey of senior executives across the global derivatives market, found that just 12% of respondents thought that ICE Futures Europe would have 100% of the market for FTSE 100 trading in 12 months’ time with the majority of respondents predicting a split of liquidity across both CBOE and Eurex.
Significantly, respondents were split on where they think the liquidity will go with Dutch-based proprietary trading firms generally predicting that CBOE will gain market share while sell-side clearing executives were most likely to predict that liquidity will shift to Eurex.
Expectations for the scale of the shift in liquidity, however, suggest a slow build with three-quarters of respondents forecasting that ICE Futures Europe will have a market share of more than 50% in a year’s time and 62% believing it will be over 75%.
On the face of it, this expectation of a successful competitive challenge is surprising considering the long history of failure when it comes to wresting liquidity away from incumbents in listed markets.
Indeed, next month marks my 10-year anniversary covering the futures market joining as editor at FOW in April 2011. My first cover story? Adrian Farnham on the LSE’s launch of FTSE 100 futures and options to challenge the monopoly of Liffe.
Others have been more successful than the LSE’s ill-fated bid. Dutch MTF TOM built considerable market share (the exact % was the subject of many communications with press officers and the odd one with lawyers during my time at FOW so I will avoid controversy here) Euronext in the AEX index and provided genuine competition, improving market efficiency and lowering fees at both markets before it closed in 2017 after its commercial model proved unsustainable.
What has changed over the past decade that might suggest a chance of success in a competitive challenge? Brexit is one obvious point, on which Eurex seems to be betting. For CBOE the major sell is margin efficiency – it will offer trading in look-a-like contracts on all the major European benchmarks and clear them into a single CCP.
The few instances of successful liquidity shifts in the history of listed futures are fuelled by major regulatory or structural changes in the market. The shift to electronic trading in the famous case of the bund going from Liffe to Eurex and the restrictions on offshore trading in the Japanese market in the instance of Nikkei liquidity moving to Singapore are two such examples.
A mishandled Brexit transition in financial services (which, let’s be honest, based on progress to date is certainly a realistic future scenario) that rendered trades on UK listed venues considered OTC by the EU would certainly represent a regulatory shift in the market sufficient to move liquidity.
In addition, TOM showed that with the right backing and economic incentives, the European equity derivatives market is ripe for competition. Indeed, Eurex has built up a sizable market share in several European indexes that were once the exclusive domain of local markets.
But the Bund moving to Eurex was also a result of missteps by Liffe, which failed to appreciate the severity of the challenge until it was too late. Few would be on ICE making similar errors (and its long-standing Brexit hedge in the acquisition of Holland Clearing House, which ironically was initially set up to clear trades for TOM, remains a viable option in the event of a regulatory split between the EU and the UK).
Whether either Brexit or margin efficiency will be enough to shift liquidity remains to be seen but the increased competition is a welcome development in an equity derivatives market that falls way short of its US equivalent.