Europe’s derivatives markets are under pressure. Exchanges are splintered across the continent and are subject to undue complexity.
“There’s lots of things that are suboptimal,” Cboe Europe’s president Natan Tiefenbrun admits. On his list of problems: it is geographically fragmented; products are subtly different at every venue; and venues can’t agree on contract expiry and execution terms.
That’s not made the market conducive to growth, he says. Complexity has driven away retail investors and the lack of standardisation has stymied institutions.
“It is not a model that creates its own growth momentum,” he adds.
But Tiefenbrun is optimistic. Change is coming to Europe, with both London and Brussels looking to shake up regulation to reinvigorate their capital markets.
READ European markets have suffered a ‘lost decade’ says Cboe’s Europe head
He is equally positive about his own firm. Cboe has grown over the past few years to become one of the largest equity trading venues in Europe. It is neck and neck with Euronext in terms of market share — each handles about a quarter of the equities traded in Europe.
As a result, Financial News named Cboe as the Exchange Group of the Year at the Excellence in Trading & Tech Awards in June.
Tiefenbrun, who picked up this year’s Personality of the Year award at the event, says Cboe’s growth has come down to offering “complementary services” outside the main trading book, such as reference price and periodic auction order books.
“We compete by offering a diversity of trading services and by being innovative,” he says.
The Chicago-based exchange continues to grow its footprint in Europe. Cboe recently announced it was getting into the IPO business, though a European listing on the exchange is still at least a year away.
The exchange launched its European derivatives market in September 2021. That has steadily grown and Cboe will add single stock options to it in November.
“It is clearly additive to the ecosystem,” Tiefenbrun says. “A more liquid derivatives market in Europe will create a positive feedback loop and enhance liquidity in the cash equity market.”
But Europe’s equity derivatives market is still dwarfed by Asia and North America. Cboe hopes to use its expertise in the US derivatives market to jump-start an equity derivatives boom on the continent.
“We’re talking to clients who are super-active in the US single stock options market who cannot be active in Europe because the market structure just does not exist in a way that allows them to run their strategies,” he says.
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That plan is easier said than done. Clearing fragmentation is a major hurdle. In the US, equity derivatives clearing is funnelled through the Options Clearing Corporation. In contrast, each European exchange has its own in-house clearing service. That results in inefficiencies.
“Clearing members don’t get margin relief from holding opposing positions. They have to pass on those costs because those positions are not to be consolidated into a single clearing house,” Tiefenbrun says.
And despite reforms, clearing continues to fragment. For example, Euronext is ending its partnership with clearing house LCH’s Paris business as it develops its own service for clearing derivatives.
“Unfortunately [reviews of the EU’s MiFID II and MiFIR legislation] are removing the notion of any form of interoperability or open access in respect to derivative exchanges and clearing houses… The regulatory framework to allow for that kind of collaboration is being unwound at the behest of incumbents,” he says.
But although European capital markets have suffered “a bit of a lost decade”, according to Tiefenbrun, things are now moving in the right direction overall, he believes.
In June, following a decade of debate, the EU agreed to changes to MiFID II that will establish the terms of a central data source for all equities trading in the bloc known as a ‘consolidated tape’. Tiefenbrun and Cboe had lobbied hard for the consolidated tape to include real-time, pre-trade data. In the end, the EU’s three legislative bodies compromised — its consolidated tape will be close to real-time and include anonymised pre-trade data.
“Unfortunately, part of this compromise has been protecting incumbent exchanges at the expense of investor protection,” says Tiefenbrun.
It is too early to say if the tape will be sufficient to meet investors’ needs. The technical language is yet to be written; exchanges and asset managers have also announced joint ventures and are jostling to become the provider. There are still many unknowns concerning what the final tape will look like.
READ Forced EU clearing could damage capital markets, industry groups warn
Tiefenbrun says he hopes there will be some leeway for venues to send more information voluntarily.
“The consolidated tape is key to unlocking retail participation, key to enabling competitive trading and its key to simplifying the way international investors look at the European market.”
The UK is also casting an eye to the future, passing the Financial Services and Markets Act into law in June, and the government indicated in July that it was looking to create its own UK consolidated tape. The same month, Chancellor Jeremy Hunt outlined further reforms in this year’s Mansion House speech.
“The UK wants to compete on openness. That’s a differentiating strategy and quite refreshing,” Tiefenbrun says. “That’s a model that is about lowering the barriers to participating in the UK marketplace.”
He says listings is an area where openness could be an advantage. “Are the UK’s listing rules so different that we need to force a company already abiding by very high standards in other equivalent jurisdictions to also abide by ours?
“This concept of competing on openness is a really positive one. In this example, issuers could come here and get capital from retail investors without that extra cost or complexity,” he says.
CV
Born
July 1970
Education
1988-92
BSc (Hons) in Computing, University of Edinburgh
Career
2022-present
President, Cboe Europe
2021-22
Head of equities, Cboe Europe
2013-21
MD, Bank of America
2012-13
CEO, Turquoise
2009-12
Various, London Stock Exchange Group
2006-09
COO, XConnect Global Networks
1993-2005
Various, Instinet
To contact the author of this story with feedback or news, email Jeremy Chan
