Quant Traders That Dominate US Options Market Move in on Europe

Yahoo

3 days ago

(Bloomberg) -- The option market makers that dominate US trading are taking a bigger share of volume in Europe.
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While the tariff-driven market turmoil in April boosted trading on both sides of the Atlantic, Europe remains far behind. Even with talks about the end of 'US Exceptionalism' and investment flows directed away from the country, Europe lacks the abundant retail demand that drives a robust, relatively transparent options market in the US.
But despite the differences, in both places market makers are pushing in to service customers directly. More nimble, with more sophisticated quant models than traditional banks and comfortable hedging across markets, they already held 30% of the open interest in Euro Stoxx 50 Index listed options on Eurex in 2022, an Acuiti report found at the time. Their share is estimated to have grown further since then.
'Market makers have long been dominant players in the US options market, consistently making up the top three participants by volume,' said Josh Ward, an equity-derivatives salesman at Susquehanna International Group. 'This trend is now emerging in Europe.'
While market makers have historically maintained a strong presence on screen, they're increasingly capturing share in off-screen volumes in Europe. Also known as principal trading firms, they're making up two of the top three participants in block trades on Eurex so far this year, Ward said.
'Principal trading firms now have very established relationships with the buy-side,' said Piebe Teeboom, secretary general of the European Principal Traders Association. 'Within the options space, the trend of buy-side firms seeking out PTFs on off-screen blocks is only likely to increase given how competitive those firms are on pricing.'
It raises the question of how much the presence of quant firms can encourage more overall volume in Europe, especially from the smaller, non-institutional traders that have driven US growth.
But they still face challenges in the region. A big one is the frequency of late cross trades that aren't initially visible to the wider market — where a placeholder is made at 6 p.m. UK time and the price is disclosed at 10 p.m. That reflects, at least in part, traders' concerns about information leaking out.
The intensifying competition in Europe is a boon for buy-side clients, who despite stagnant volumes are able to trade big option blocks on index and single stocks. On any given day, several billion euros in notional value could be sourced on Euro Stoxx 50 options in a single ticket.
'The rise of dedicated market makers is a net positive for investors as it leads to more competitive pricing across asset classes, which our clients ultimately benefit from as end investors,' said Stefano Amato, senior fund manager at M&G Investments. 'It's also prompting banks to become more competitive and/or focus on certain segments where they have a particular strength, which again in aggregate contributes to bringing down the overall cost of trading for market participants.'
While the European market has become increasingly competitive, some buy-side firms view the relationship with banks holistically: They're working with them across other asset classes, hence keeping a big portion of the equity-derivatives business with them.
But daily options flow has always been highly commoditized and price sensitive, so even the most loyal clients may shift more orders to the market makers. Some market participants have noted that option auctions are at times so competitive that pricing becomes inverted, with some market makers willing to offer below the bid in order to win the business.
'We attribute the expanding footprint of market makers' direct client trading desks to their ability and willingness to consistently quote tighter spreads and larger sizes for their clients,' said Ward. 'Their conviction to do this is supported by significant resources, including advanced technology, balance sheet capital, specialist back-end infrastructure and larger, more experienced trading teams dedicated to their respective areas of market expertise.'
The shift in options flow to firms like Optiver and Susquehanna is an extension of a gradual trend since the Great Financial Crisis of some banks focusing on more profitable businesses such as Quantitative Investment Strategies and light exotics. While they compete with market makers for buy-side clients, they still work together to offset risk.
'We continue to work closely with banks and see our role as complementary to the services they provide to their clients and to us,' said Edward Monrad, head of corporate strategy for EMEA at Optiver. 'There's still plenty of room for growth as well.'
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