Market participants have raised doubts on the potential success of Nasdaq OMX’s new derivatives venue because of a lack of differentiation compared to established platforms.
The US-based exchange operator’s new NLX multilateral trading facility (MTF) is scheduled to launch in Q1 2013 and will offer trading in short- and long-term interest rate euro- and sterling-denominated derivatives.
The introduction of new rules that standardise swaps where possible so they are suitable for trading on exchange-like platforms and central clearing has presented new opportunities for European derivatives trading venues. The US plans to adopt similar reforms as part of the Dodd-Frank Act.
“This puts us in a prime position to capitalise on market structure changes in this space, partly driven by Dodd-Frank, EMIR, MIFID II and Basel III,” said Charlotte Crosswell, CEO, NLX. “NLX will enable simplified execution of a broad range of hedge, strategy and contingent trades and will support registration of both central order book and off order book trades on the same platform. An innovative approach to daily and final settlement price determination, where necessary, will link settlement prices to the wider OTC markets, thus providing more accurate and timely settlement price publication.”
Post-trade services for NLX will be provided by Anglo-French central counterparty LCH.Clearnet, with all instruments cleared through Synapse, the CCP’s derivatives clearing platform.
Users of the venue will also benefit from collateral efficiencies, with listed products across the yield curve cross-margined within a single clearing risk pool using PAIRS, LCH.Clearnet’s proprietary value-at-risk-based margining methodology.
European derivatives trading is currently dominated by Deutsche Börse-owned Eurex and NYSE Euronext’s Liffe markets. The two exchange groups attempted a merger last year – the primary driver of which was the combination of Eurex and Liffe. But despite making a number of concessions, European competition authorities blocked the merger on the grounds that it would create a monopoly in the region’s exchange-traded derivatives market. Nasdaq OMX was among those that fiercely opposed the merger.
"Moderate threat"
According to Richard Perrott, exchange analyst at private German bank Berenberg, NLX’s cross-margining plan may pose a “moderate” threat to the dominance of NYSE Liffe and Eurex. He noted that similar cross-margining arrangements at NYSE Liffe’s US market have allowed it to grab around 2% of trading and 9% of open interest in CME Group’s flagship Eurodollar futures contract.
But he added, “This [threat] is probably offset by the fact that existing exchange-owned CCPs can look to attract OTC clearing flow by offering cross-margining with their pools of cleared listed futures.”
Others queried whether the new platform was sufficiently differentiated to attract volumes.
"Competition in derivatives trading is good for market participants, but it is difficult to tell from the Nasdaq OMX announcement what the incentive to trade on its market is,” said Peter Lenardos, director, diversified financials at RBC Capital Markets’ global equity division. “Trying to compete in this market is a daunting challenge and it will be hard to entice investors away from platforms where they already have collateral posted without new and innovative offerings."
London Stock Exchange-owned MTF Turquoise launched its listed derivatives platform last June and currently offers trading in FTSE index options and futures. Rival MTF BATS Chi-X Europe is planning its own derivatives foray through a joint venture with Russell Investment. The partnership resulted in the creation of the Chi-X Europe Russell Index series, a collection of European indices across 14 of the continent’s markets that have been designed to become tradable products.
NLX will be based on Nasdaq OMX’s Genium INET platform and will allow members to connect using FIX and ITCH, the exchange group’s protocol for delivering low-latency market data. Testing of the new derivatives market technology is already underway
NLX will be the exchange’s first European initiative since the closure of its equity MTF Nasdaq OMX Europe in July 2010 because of low trading activity. The pan-European stock trading venue, which was also run by Crosswell, had a market share of 0.2% in its last full month of trading.
Launch of NLX and the cross-margining functionality is subject to approval by the Financial Services Authority.