Chi-X picks CHERIs for first taste of derivatives competition

A partnership between pan-European equities trading platform Chi-X Europe and indices provider Russell Indexes has borne fruit with the launch of the Chi-X Europe Russell Index (CHERI) series.
By None

A partnership between pan-European equities trading platform Chi-X Europe and indices provider Russell Indexes has borne fruit with the launch of the Chi-X Europe Russell Index (CHERI) series.

The new index series is the latest step in the multilateral trading facility's plan to widen its assault on European exchanges by offering index-based derivatives at an as-yet-unspecified future date.

Cherry-picking the best stocks from 14 European markets, the new pan-European and euro-zone indices have been designed as tradable products which track price movements more tightly that existing benchmarks.

“An index has two uses. One is as a benchmark for performance comparison, the other is as a tradable index. Our new index is easy to trade,” said Scott Stark, head of Russell Indexes Europe and former CEO of STOXX, where he helped establish the EuroSTOXX 50 index.

According to Alasdair Haynes, chief executive of Chi-X Europe, there was vast room in Europe for more tradable indices that can support the creation of index-related products, such as exchange trade funds. Haynes decried the 13-year-old EuroSTOXX European index as an “appalling proxy for a tradable index”.

“[EuroSTOXX] does not reflect the markets well and it is not useful as an asset manager's benchmark,” he said. “Our new indices are all well-correlated and on a single platform, rather than picking prices from multiple exchanges that have different pricing structures and costs.”

Trading in equity index derivatives in Europe is largely dominated by Eurex and LIFFE, the respective derivatives platforms of would-be merger partners Deutsche Börse and NYSE-Euronext. Turquoise Derivatives, the derivatives venue launched by the London Stock Exchange (LSE) in June this year, has so far been refused a licence to offer products based on the EURO STOXX index series by index owner STOXX, which is majority owned by Deutsche Börse and SIX Group. The LSE has been given hope by a proposed amendment to the European market infrastructure regulation (EMIR), which states that where intellectual property rights or commercial ownership relates “to products or services which have become or impact upon industry standards there shall be a requirement for licences to be available on proportionate fair, reasonable and non-discriminatory terms”. European finance ministers are due to discuss EMIR later this week.

At launch, Chi-X Europe and Russell will offer four varieties: CHERI PanEurope, which includes 216 securities across 14 countries and five currencies; CHERI euro-zone, based only shares from the most liquid class of a company's shares, currently including 136 euro-denominated securities across 10 countries; CHERI60, incorporating the 60 biggest stocks from the CHERI PanEurope; and the CHERI40 – a subset of CHERI euro-zone.

Haynes said Chi-X Europe was “continuing to discuss with trading participants, the merits of listing derivatives on one or more of the indices” but would not be drawn into confirming timeframes of when any such products would be launched.

The four new indices were constructed using Russell's rules-based methodology, which Stark said would ensure consistency, predictability and objectivity. The pricing for the indices is supplied by Chi-X Europe, which the MTF asserts will deliver “unprecedented homogeneous pricing for stocks across Europe”.

Haynes said the new indices would provide targeted exposure by incorporating the most liquid and highly capitalised stocks across Europe to gain the necessary regional coverage and high investability. He believed the indices would efficiently balance currency exposure and tracking error with the number of constituents to appeal to the widest possible audience of equity index users.

The partnership between Chi-X Europe and Russell Investments was first announced in March 2011, bringing together Chi-X's almost 20% market share in European equity trading and Russell's US$3.9 trillion assets benchmarked to its indices.

“Until now, competition has been lacking in the pan-European indexing field,” said Haynes. “Our new index series can bring a new dynamic to the market and will be a force for improving upon the status quo. We have every confidence fund managers will embrace these improved benchmarks in due course and that traders will want to deal in products based on our new series.”

“We identified demand from the market for pan-European indices across a range of levels and our new indices offer a neatly packaged way to meet this demand – all within the framework of Europe's largest stock market,” said Stark. “We have built these indices in line with our tried and tested transparent methodology which will give confidence to the market.”

Russell is now valuing and distributing the new indices using Chi-X Europe's traded prices. To ensure an effective end-of-day value for the indices, Chi-X Europe is calculating its own closing price by using a time weighted average price (TWAP) algorithm.

Chi-X Europe has entered into a merger agreements with BATS Global Markets, parent of rival MTF BATS, and is awaiting approval from the UK Competition Commission.

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