Source: BURSA MALAYSIA | Published: January 2024
Equity derivatives derive their value from changes in the prices of underlying assets, usually stocks or stock indices. They are popular among traders to engage in speculative activities and manage risks of their stock portfolio. Equity options and equity index futures are the two main forms that the asset class often takes, but there are also alternative forms including equity swaps, warrants, and single-stock futures.
Accounting for 40% of the global derivatives market, Asia-Pacific is the largest market in the world as at April 20221. North America is second, with a share of around 30%. Most prominent among the international derivatives firms are Goldman Sachs, Deutsche Bank, Citi, J.P. Morgan, Morgan Stanley, among others.
Industry specialists believe that high-frequency trading in China's futures market yielded profits of roughly 5 billion yuan ($725 million) in 20192. Foreign companies accounted for about 60% of these earnings. The three-leading high-frequency traders, boasting the most sophisticated technologies, collectively earned at least 2 billion yuan. Financial and commodity derivatives fall under this category.
Current Landscape
Being contained by national borders inevitably limited the scope for competition among European exchanges. However, with the advent of the European Monetary Union in the 1990s and the ability to trade across borders, a favourable environment has been created for competition to flourish.
In today's extremely competitive equities derivatives market, major European exchanges like ICE, Eurex, Euronext, CME Group, and Cboe Europe Derivatives (CEDX) are always competing for market dominance.
Since Europe's index futures and options markets were mostly local, competition among European exchanges in the equity derivatives field has historically been minimal, save from single stock futures and options. Investors would trade Italian equities derivatives on the Italian exchange, for instance, and would do the same if they wished to trade German equity derivatives on the German exchange, etc.
The evolution of the European financial landscape, especially since the establishment of the European Monetary Union, has significantly expanded the horizons for trading exchanges. No longer constrained by national boundaries, exchanges now have the liberty to compete across borders. The introduction of cross-border trading not only diversified the market but also intensified the race for supremacy in this dynamic ecosystem.
The market for European equities futures seems to have started to change as competition intensifies. FTSE derivatives and MSCI derivatives are ICE's two largest product suites, with over 95% and 73% market share, respectively as at July 2022. 73% market share, respectively as at July 20223 .
ICE refers to itself as the “home of the UK derivatives market.” The CBOE UK 100, on the other hand, is offered by Cboe Derivatives Exchange and directly competes with FTSE derivatives. In addition to its other listings, Eurex offers the dominant Euro STOXX derivatives. This raises the question of how the major exchanges can set themselves apart in this fiercely competitive industry, especially given that some of the items they offer are rather identical. It's difficult to get into this market, especially given the dominance of established firms. So how precisely do you distinguish yourself? When offering equities derivatives, there is one point on which all major exchanges can agree; liquidity is essential. As a result of regulatory reforms (UMR) and surges in volatility, traders may increasingly focus on margin efficiency in addition to liquidity.
Going Forward
A report by The Business Research Company states that the equities derivatives market is expected to continue to grow, providing market players with improved products and lower trading costs due to continued competition and exchanges wanting to constantly expand their offers4.
It is interesting to examine how exchanges react to requests to launch new or improved products in a market when there are many "look-alike" products.
In the upcoming years, competition in the stock derivatives market is likely to persist, and exchanges even appear to value this degree of competitiveness. It remains to be seen whether additional participants will (or can) enter the market, but given Cboe Europe Derivatives' effort, more players may enter this thriving asset class
TA new, more mobile legal environment is also taking shape, and transformational structures can lead to the creation of qualitative models for growth. The global derivatives market is a key supporter of both the world economy and the worldwide financial system. Nowadays, firms around the world use derivatives to successfully manage risks and lessen pricing uncertainty. By enhancing asset price discovery, derivatives boost market efficiency and aid in economic growth.
Changes have been made due to the process of consolidation, the development of new trading platforms, alternative exchange trading systems, and increasing competition. The expansion of new services, from the ability to complete transactions on electronic stock exchange platforms to in-depth financial and economic analyses of the performance of listed companies and other assets, reflects the transformational evolution of today's financial stock exchanges.
References
1Derivatives Market Trends Insights 2022-2027 | Market Size (globenewswire.com)
2China's murky world of high-frequency futures trading - Nikkei Asia
3The evolution of equity derivatives: an asset class that’s all grown up (thetradenews.com)
4Derivatives & Commodities Brokerage Global Market Report 2023 (reportlinker.com)
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Tags: Derivatives