Nasdaq OMX is making a renewed effort to bolster competition in Europe’s derivatives landscape, ahead of new rules that are likely to see more trades head into the listed exchange realm.
Earlier this week, transatlantic exchange operator Nasdaq OMX bought a 25% stake in Tom, the Dutch-based cash equity and equity derivatives multilateral trading facility, with a five-year option to purchase a controlling 50.1% stake in the firm.
Nasdaq OMX is also at an advanced stage in launching its new London-based derivatives exchange, NLX, which will offer similar short-term and long-term interest rate products and euro and sterling-based listed derivatives to those currently provided by either NYSE Euronext’s Liffe or Deutsche Börse’s Eurex, which between them currently control over 90% of trading in some European contracts.
Tom has, meanwhile, managed to carve out a 15% market share in equity options in the Netherlands, Europe’s second-largest options market, after just 10 months of operation by going up directly against NYSE Liffe. There are longer term plans to take the model outside of the Netherlands and become pan-European, which will further threaten the market share of Liffe and Eurex, the two derivatives giants of Europe.
“Nasdaq’s move to buy a stake in Tom is a pure derivatives play,” Philippe Carré, global head of client connectivity at SunGard’s capital markets business in London, a trading technology firm, told Markets Media.
“This fabled derivatives competition has yet to arrive in Europe but Tom is a good example of making this happen. Tom has shown that even though it has issues and hang-ups in its set-up regarding clearing and settlement like all other new entrants will have, you can still provide competition against what is very much a duopoly in Europe with Liffe and Eurex.”
Nasdaq’s launch of NLX, which is set to happen in the first quarter of 2013, is also set to spice up competition in the derivatives space in Europe, which has yet to see an equities-style explosion of venues although this may change once the new G20 mandate aimed at reducing risk and increasing transparency to the vast OTC derivatives market kicks in some time next year.
Tom is also equally driven and will hope to use the might of Nasdaq OMX to build a bigger derivatives base in Europe.
“Due to the solid and global Nasdaq OMX network, European expansion of Tom is within reach,” said Willem Meijer, chief executive of Tom. “Moreover, with their advanced technology and expertise, Nasdaq OMX will contribute positively to the future successes of Tom.”
Although Carré at SunGard believes that Tom are content, for now, to keep operating specifically in Dutch stocks and want to gain a market share in the Netherlands of around 40% before planning further European domination.
“They know their market well,” he said. “Their model could be extended to French, U.K. and German stocks but they would be out of their comfort zone. They know what they are doing and how to do it. Although their success is getting a lot of other people interested. The Bats Chi-X Europes of this world could be looking at it and thinking they could do it better.”
In the U.S., the equity options market has expanded rapidly in recent years due to a plethora of new exchanges in the space.
“Volumes have exploded in the U.S. with nine equity options markets now competing,” said Carré.
“I’m not sure if it’s because of or thanks to, but the nine markets out there have really galvanized the market. In Europe, things have been stagnant and there has been no improvement with trading volumes down; there just hasn’t been that spike in volumes that we’ve seen in the U.S..”
Carré also believes that Nasdaq needs to find its niche within Europe, or faces losing some ground to the other big exchange players.
“The Nasdaq franchise in the U.S. is big but in Europe they only really have the Nordic franchise which is suffering a lot from fragmentation,” he said. “They have lost a lot of volumes to alternative trading venues and to OTC. So they really need a new start. Its previous pan-European attempts with Neuro and Easdaq both failed. They risk becoming not as important as they think they are in Europe and Europe is a very big market.”