Derivatives exchanges look to expand market-making capabilities

Meanwhile, Euronext.Liffe will also be looking to expand its market-making structure in the new year. Fraser Cowie, executive director of marketing at Euronext.Liffe, said the exchange is looking to migrate its existing ELPS (Euronext.Liffe Liquidity Provider System) structure, which currently operates only on the Amsterdam exchange, across to Paris and London.

“There are parts of ELPS we can export to other markets that would radically improve the quality of the central order book. We are trying to determine at the moment which parts of ELPS we will take and apply to the other markets,” said Cowie. By March, he says the company will have a final set of proposals for an ELPS-type structure for France and the UK, but an actual launch date was undetermined.

Market makers are required to provide either on-request or continuous pricing to the market, subject to pre-set maximum spreads. In return, they receive benefits, generally in the form of lower transaction fees from the exchange.

Rudolf Ferscha, chief executive of Eurex, said: “Our new market-maker model will further increase liquidity and transparency in pan-European equity options trading, resulting in tighter spreads and better execution.” The exchange believes its initiative will “attract additional order flow from over-the-counter trades”, it said in a statement.

Cowie, however, is dubious about exchanges' ability to take OTC market share. “Our strategy is to offer a hybrid market where we provide the kind of services the big banks want to help them trade between themselves. And for those that wish to trade on the central order book, we provide a richer quality of market. However, it wouldn’t be right to say that a market-maker scheme, whether its ours or anybody else’s, is designed to attract business from the OTC market,” he said.

Previously, Eurex MM capability was only provided for a limited number of stocks. Now it will offer market participants MM for all its European equity and equity index options.

As opposed to regular MM, where the firm is obliged to respond to price requests, permanent MM requires the dealer to provide continuous quotes for an average of 85% of the trading period. The dealer has to quote calls and puts in five strikes in every expiry within the maturity range. Dealers are also subject to restrictions on the prices they offer.

Advanced MM requires continuous quotes for a set of pre-defined index and equity options, of which there are six sets - the DJ Euro Stoxx50 and its components; the DAX and its components; the SMI and its components; all Eurex-listed Dutch equity options; all Eurex-listed French equity options and the DJ Italy Titans30 index; and all Eurex-listed Italian equity options.

Transaction fees for market makers are reduced by anywhere up to one fifth of the original fee. For instance, a DJ Euro Stoxx50 option will cost you €0.30 per contract, but €0.15 if you are a regular or permanent market-maker, and a mere €0.08 if you are an advanced market maker.