Interview with Cathal Hardiman: Room for growth in the U.K. equity options market (Artikel in Englisch)

Eurex: The U.K. equity market is the biggest in Europe. Back in 2009, Eurex Exchange began listing options on U.K. single stocks. In the past 12 months, the average daily volume in this segment was approximately 850 contracts. How satisfied are you with the developments of these products at Eurex Exchange?

Cathal Hardiman: At the moment we believe that U.K. single stock options have yet to reach their potential. Other markets trade substantially higher volumes in this options segment and therefore we are of the opinion that there is considerable room for growth.

One thing we think Eurex could do to attract more volume in U.K. single stock options would be to offer something different than what is currently available, with a particular focus on making the products more attractive and transparent for retail investors. For example only a small minority of the trading currently occurs on screen, as the screens are often wide and in small size. We believe that if Eurex could encourage market participants to show more liquidity on screen these products may become more attractive for retail investors. We feel this would lead to increased overall volumes traded in U.K. products, as well as an increase in Eurex’s market share in this space.

Another possible improvement would be to investigate the multiplier for these products. The current multiplier (1000) can result in very high notionals for 1 lots; for example RIO LN (1 lot = £30k notional). Reducing the multiplier could result in more manageable sizes for retail investors to trade within their capital constraints.

We have recently begun market making all listed U.K. options on Eurex, and are
also making prices to clients both directly and via the IDB market. We are committed to helping grow this market, through improving displayed liquidity and depth of the order book.

Eurex: The United Kingdom appears to differentiate itself from the continental European financial markets, for instance the existence of Contracts For Difference. Can you please explain to our readers what relative position equity options occupy vis-à-vis other types of similar derivatives based on U.K. stocks and what the main differences are between them?

Cathal Hardiman: Other derivatives like futures and CFDs track the underlying stock on a one-for-one basis, and in this sense are less complex than options. One result of this is that options are not listed on as wide a range of underlyings compared to futures and CFDs.

The key benefit options offer is flexibility. While a CFD or futures position can only necessarily be long or short, options strategies can be delta neutral, not taking an opinion on the direction of the market, but instead taking an opinion on movements in volatility (profiting from a stock move, without committing to a direction).

Also, when looking for directional exposure, options allow investors much more leverage than other derivatives. For example, buying far out-of-the-money calls for a few cents will win if stock sees a large up move, giving you a much higher return compared to simply getting long stock through futures or CFDs. Along the same vein, options provide a cheaper method for an investor to hedge his downside risk by buying out of the money puts.

Options provide investors with much more flexibility and leverage, but are more complex instruments. Here at Susquehanna we see our role as one of increasing transparency in the options marketplace, as well as allowing our customers to leverage our expert knowledge and be confident in their understanding of the options strategies they are executing through our sales desk.

Eurex: Which market participants are primarily active in the U.K. equity options market and how do they utilize the contracts?

Cathal Hardiman: Participants on the buy side can vary in size and scope. On screen we see market participants execute small clips as well as larger clips.

In the IDB market we tend to see larger sizes going through, with institutional investors or investment banks on the other side. Institutional investors active in U.K. options include asset managers, hedge funds, and pension funds.

As well as trading with these institutional investors in the IDB market, we also have a number of institutional clients who trade with us directly.

This institutional flow can either be for position taking or hedging, with many Asset Managers buying downside puts to protect their portfolios, or selling upside calls to enhance their returns.

On the sell side we have market makers, like Susquehanna, investment banks and proprietary trading firms. Investment banks and prop houses will sometimes be looking to balance flow, and sometimes taking a position. Market Makers are more likely to be balancing flow.

Eurex: You are one of the most active global trading firms with a quantitative bent. How do you see your role in the market for U.K. equity options?

Cathal Hardiman: Our primary role is that of a major liquidity provider. We accounted for over 24% of all Eurex equity option trades on screen in 2013 (16% including OTC). Across all exchanges, we were responsible for 25% of all on screen trades (8% including OTC) in U.K. equity options.

We are Designated Market Makers in over 70 U.K. names, including all U.K. Eurex listings, publishing quotes to the screens constantly during market hours. In cooperation with Eurex, we plan to continuously add to the number of U.K. names listed on Eurex to meet customer demands.

Of course, since the tick size is so small in U.K. names, these screen markets may sometimes look wide to customers looking to trade. If a client comes to us directly, we can often come inside screen quotes, or show more liquidity than what is on screen. These trades will then be executed via the Eurex Trade Entry Services.

As well as keeping markets in line and balancing flow, we have a role working closely with the various exchanges, discussing new product listings, spreads, quoting requirements and other ways to increase transparency and trading volumes in the marketplace.

Eurex: In your opinion what are the advantages of trading at Eurex Exchange?

Cathal Hardiman: A primary advantage of trading at Eurex for an investor is the ability to trade derivatives on underlying equities from multiple European countries.

Combined with the innovation and addition of weekly options in EURO STOXX®,  DAX®, equities and sector options which are increasing in popularity, an investor has a broad range of investment opportunities in one location.

Eurex: And to conclude: Eurex Exchange has achieved a market share greater than 50 percent in French equity options, despite the fact that the French cash market is not operated by Deutsche Boerse. How do you perceive the long-term potential of U.K.  equity options at Eurex Exchange?

Cathal Hardiman: As mentioned earlier Eurex has been successful in the past in listing options on stocks where they are not operating the cash market. The long term potential for the U.K. segment is similar in our view and now that Eurex has a committed Market Maker in these options offering attractive size and prices on the order book we are expecting to see the benefit in the coming months and years.

A primary advantage that London options have on other non-domestic options listed on Eurex is the ability at expiration to deliver the primary listing of the underlying rather than an illiquid secondary line listed on Xetra. This avoids the requirement of instructing a depot transfer of the underlying to cover position after expiry.

Eurex: Thank you very much for sharing this with us, Mr. Hardiman.

As well as London options, Susquehanna’s options sales desk is making commission-free prices for clients in the vast majority of equity and index options on Eurex and other exchanges.