Exchange of the year: Eurex

Completion of NextGen ETD platform paves way for daily options extravaganza

Michael Peters

The rush for ever shorter options expiries hit fever pitch in 2023, as investors flocked to single-day contracts offering low-cost bets on intraday index moves.

In August, Eurex transferred a trend that had already gripped US markets to Europe, launching the first end-of-day index options on the Euro Stoxx 50. The first month of trading surpassed expectations, as more than 330,000 contracts traded.

“It was one of the most successful product introductions that we had,” says Eurex CEO Michael Peters. “Normally you start at a lower level and have an acceleration phase, but this was one of the most successful launches in terms of solid volumes and immediate open interest from the very beginning.”

It’s easy to see the launch as a natural response to the US success story. Trading in Cboe’s zero-day-to-expiry (0DTE) options on the S&P 500 (SPX) gathered pace in late 2022. By the first half of 2023, the instruments represented more than 40% of all SPX options trading at the bourse.

It was one of the most successful product introductions that we had

Michael Peters

Yet Eurex’s plans had been in the works for more than three years, slowed only by an ambitious – and twice delayed – overhaul of rickety infrastructure designed for monthly expiries.

“Without the delays, we may have been the first mover on this topic, but it was our intention to do this diligently and have the proper infrastructure set up with the market-place and all relevant parties ready,” says Peters.

“Shorter-dated options is a phenomenon we see in the industry, and we want to reflect that from an architectural point of view. We could have done that in the old system but it would have been less convenient and less functionally comfortable.”

After three years in development, the NextGen ETD platform finally went live in March 2023. The new system changes the way futures and options contracts interface with the Frankfurt-based exchange, allowing the bourse to list more than one expiry per month per product and paving the way for expiries every day of the week, as well as making trading spreads between differently dated versions of the same contract far easier.

“It was a major undertaking, both for us and also for our market participants,” Peters says, noting that more than 300 staff at Eurex and parent Deutsche Börse were involved in the project.

The need for an upgrade was pressing. Weekly options, which went live on the old architecture in 2018, were treated as multiple separate products by trading systems, creating logistical challenges for users.

If the market is not ready, it doesn’t make sense to launch a new infrastructure, so we agreed to postpone it

Michael Peters

“The old system was very bad,” recollects a market-maker. “It caused a lot of issues from a client experience point of view,” he adds, noting it was particularly unwieldy to trade one-week contracts versus another week.

Some participants were sceptical when the exchange unveiled its plan in 2020. “Of course, people had reservations,” says a European client clearing executive.

Requiring software rollouts to clients spanning trading, clearing, risk management and market data, the market needed additional time for simulation, while launch was also dependent on vendors who had to adjust middle- and back-office software.

“It’s always our intention to work collaboratively with the market-place,” says Peters. “If the market is not ready, it doesn’t make sense to launch a new infrastructure, so we agreed to postpone it.”

Clients welcomed the approach. “What has been really good is their flexibility in terms of delaying the original timeline when they realised not everyone was ready,” says a senior European banking source.

Some naturally begged for more time even after a two-year delay. Eurex ensured contingencies such as backwards compatibility was in place for those that needed it.

“The change has been successfully executed,” says the banker. “No-one has actually suffered material repercussions on the back of this change”.

He adds that even the most esoteric products will “look and feel” identical to more vanilla instruments.

“By any measure it has been a big success,” says a market-maker. “I’m still very bullish about it,” he added.

Peters says around 60 firms have participated to-date “I think that is really a huge success. It’s a great combination of institutional flow, or agent flow and prop trading flow.” He adds almost 75% of transactions are happening in the order book and only 25% off book, with all trades routed to Eurex Clearing.

Trading in the new contracts also buoyed activity in longer-dated expiries as the contracts unlocked new relative value opportunities.

By any measure it has been a big success. I’m still very bullish about it

A market-maker

“Weekly options have equally grown, but daily options provide opportunities for certain spread strategies that you have on a daily basis that were simply not possible before. Therefore we did not observe any cannibalisation effects between dailies and weeklies.”

The upgraded platform makes it quicker for the exchange to launch new products. Once up and running, the main hurdle in launching the first European 0DTE product was not on the exchange side at all – rather a delay in securing a Bloomberg ticker. Eventually, on August 28, Eurex launched its Euro Stoxx 50 daily options under the ticker OEXP.

Eurex is now reaping the benefits of quicker launch times with a pipeline of new products. Daily options on the Dax – 0DAX – began trading on November 13, with more than 9,000 contracts changing hands in the first two weeks.

330,000 

The amount of contracts traded in the first month of trading on end-of-day index options on the Euro Stoxx 50

The exchange hopes to extend the new functionality to MSCI options, which trade via market-on-close standards. “The market is quite keen to establish this kind of protocol for market-on-close, and that can be easily enabled with NextGen,” says Peters.

“A third possible use is for synthetically traded cash market strategies, where you use single stock futures with a daily expiry. That will also be possible, and is something we have started to promote.”

In the US, the success of 0DTE options hasn’t been without detractors. Some worry a huge buildup of risk in these instruments could trigger a repeat of the ‘Volmaggedon’ crisis of 2018, when dealers with short-gamma positioning were forced to cut their short vol positions en masse, causing inverse Vix products to implode.

Peters remains sanguine about the impact daily options trading could have in European markets. He notes that limited retail options participation remains low in Europe given the success of structured products.

He expects the instruments to represent 10% to 15% of overall Euro Stoxx 50 options trading, similar to the share currently seen for weeklies. Three months into launch, daily options represented just 1% of overall Euro Stoxx 50 options trading, leaving plenty of scope for growth in the coming years.

Euro home

With gaps plugged in its equity options franchise, the Frankfurt exchange turned its attention to another hole in its business – euro short-term interest rate, or Stirs.

Eurex enjoys a natural monopoly on European government bond futures, and has also picked up a share of around 20% in clearing of over-the-counter euro swaps.

But in its long-held ambition to be the ‘home of the euro yield curve’ the exchange has failed to loosen a grip that rival exchange Ice Futures Europe holds on Euribor futures. Eurex’s Euribor contract has all but lain dormant since its 1996 launch. Adding to the woes, US-based CME racked up an early lead in futures linked to the euro short-term rate, or €STR.

“It is always our claim Eurex is the home of the euro yield curve,” says Peters. “We’ve built a successful franchise for the entire mid- and long-term interest rate curve when it comes to Bund, Bobl, Schatz, BUXL, OAT and BTP. What’s missing is the short-term interest rate segment, namely Euribor and €STR,”

For €STR, almost every second contract globally is traded on Eurex

Michael Peters

Now, there are signs that could be changing. On November 1, a partnership programme originally launched to bolster the euro swap clearing effort, was expanded to include euro Stir contracts, offering revenue sharing and governance incentives to an initial 20 participating banks.

Early signs are positive. Euribor futures volumes at the exchange hit a new daily record of 110,000 contracts in November. Yet it is in €STR futures, which the exchange launched in January, where Eurex seems to be making the biggest splash.

Locked in a three-horse race with CME and Ice for market share, in November, Eurex took over 40% of trading volume in all €STR futures.

“For €STR, almost every second contract globally is traded on Eurex. That has really changed the dynamics compared to the previous months,” says Peters.

Eurex hopes that will grow alongside increased demand for margin offsets users can achieve against other euro products. What’s more, the exchange could get a leg-up from anticipated European Union requirements for regulated entities to clear a portion of their euro-denominated derivatives onshore. New rules under the third iteration of the European Market Infrastructure Regulation, or Emir 3, would force EU firms to maintain an ‘active account’ at EU venues. Exactly how much volume must be funnelled into this account is still subject to intense discussion, but would apply both to OTC and exchange-traded derivatives trades.

The political and regulatory discussions around the active account do not only include OTC IRS, but equally ETD, which I think is often not taken into consideration.”

History suggests Stirs futures trading tends to coalesce at a single venue per currency. Whether €STR will follow that trend, and whether Eurex will emerge victorious, only time will tell.