30 Mar 2021


Interview with SIG on the launch of seven new equity options on Xetra listed U.S. underlyings

Paraic Rogan, Volatility Trader and Market Structure Specialist at Susquehanna International Group.

Paraic Rogan started his career with SIG in 2008, trading everything from carbon futures to volatility options. An expert in market structure and product design, Paraic answered some questions we posed on Eurex's recent introduction of equity options on Xetra U.S. underlyings.

As of 25 January 2021, Eurex launched seven equity options on Xetra listed U.S. underlyings (Tesla, Apple, Alphabet, Amazon, Microsoft, Facebook, Netflix). How does the end customer benefit from this new offering?

Here at Susquehanna, we view these new options as a welcome addition to Eurex's current equity options offering.  These options provide an opportunity for investors to tailor their strategies and better manage risk on some of the largest stocks in the world, all within EU trading hours. European investors already actively trade these stocks, and the Eurex options listing provides fair and competitive pricing for investors seeking derivative exposures during European hours.

Where is the demand coming from for such underlyings?

European demand for U.S. options has been strong for several years now. We expect demand to come from several areas, order flow from investors looking to adjust their exposure during EU trading hours or European retail flow, which may have avoided trading U.S. options given the lack of access or their higher multiplier. This type of flow exploded in the U.S. last year and these options could potentially tap into new demand. Demand may also come from structured product issuers in Europe as it provides them hedging opportunities during EU hours. Susquehanna will cater to this demand via on-screen bid/offers or via our sales desk.

What are the main differences between the European and the U.S. derivatives market?

The core difference would be market structure. The U.S. has one CCP (OCC) and multiple competing exchanges, while the EU landscape has vertically integrated exchanges.  Eurex bridges this gap by genuinely being a pan-European exchange providing exposure to equities listed across all European countries.

The U.S. equity options market is one of the most liquid derivatives markets worldwide. What is Eurex's competitive edge in this latest offering?

While the U.S. market is undoubtedly more liquid, there are several advantages to having a European listing for these U.S. options, such as removing the time zone difference and currency exposure for EU investors. And, perhaps we should compare the competitive edge to U.S. structured products. Providing a listed alternative that is transparent with broad accessibility sets it apart there.

Susquehanna was one of the first Market Maker starting to quote the new options. How do you price the options when the U.S. options market is still closed?

Susquehanna is committed to providing liquidity in these options and firmly believes that this product's success lies with a healthy order book picture. We have extensive experience across a range of products and it's that expertise that has helped build models to provide fair markets across Europe. There are also several other data points that we can use to support our pricing. Mainly there is a Xetra listing of these stocks trading throughout European hours. The U.S. pre-market trading, while relatively illiquid, can indicate where the spot will open and futures trade almost continually, so we can have a good view of the overall trends in the market.

How do you see the latest developments observed in the U.S., such as the move in Gamestop shares, and would you expect similar scenarios in Europe?

Undoubtedly, the equity market landscape is ever-changing and the most recent developments have certainly drawn a lot of interest. We have already seen spill-over effects through Nokia and other equities within Europe. This situation has highlighted the size and impact retail can have on the market and how their presence in some markets is growing rapidly.

In Europe, retail participation in the listed derivatives markets is still in its infancy relative to other venues. The demand is there but expressed through warrants or other structured products. As a result, the impact of the retail boom has been more muted here. Exchanges can and should take the lead finding creative solutions to improve access for retail participants to their markets and educating them on the benefits relative to competing products.

The Gamestop situation was unique and while it seems the chance of a directly comparable scenario is receding, as market makers, we must be prepared for such an event. We're no strangers to surges in volatility. If 2020 proved anything, it's that even in the face of unprecedented moves, European derivatives markets remain resilient with order book price discovery holding up.