Thu, 31/05/2007 - 08:00
Michael Peters, a member of the Eurex executive board with responsibility for marketing and sales, outlines the various services and incentives offered by the derivatives exchange to its product users, including market-makers and algorithmic traders.
HW: What are you doing to encourage market-makers?
MP: Eurex offers extensive flexibility via our different market making packages. Those packages focus on continuous quotation of equity-based and fixed-income options, more than 250 products in total, but are also offered to create initial liquidity in new futures contracts.
A Eurex member firm that commits to market-making for one or even a package of several option products, such as fixed income options, takes on defined obligations such as minimum size or maximum spreads to ensure a certain level of liquidity in those products.
Eurex provides various incentive measures such as the reduction of fee levels to reward these firms acting as liquidity providers; fee rebates of up to 90 percent are granted to market-makers in this context. This is considered a win-win situation for the member firm as well as for the marketplace, while it is the investor who benefits most from this approach in the end.
HW: What are you doing to keep algo traders happy?
MP: Algo traders cannot be viewed as market-makers, but from a technical perspective they have a similar demand - both seek exchange access with extremely low latency, high reliability and easy to maintain technological services, which we have always considered part of our standard service offering.
Nowadays about 50 per cent of the exchange volume, especially in highly liquid products like our Euro-Bund Futures or Dow Jones Euro Stoxx 50 Index Futures, is derived from automated trading, boosting liquidity and further reducing our already tight spreads.
A variety of measures have been launched within the framework of our technology roadmap, which is our response to the growing importance of algorithmic trading at Eurex. A cornerstone of this development was a software change allowing member firms to subscribe to unnetted price information.
To enable future growth, we offer our clients higher data throughput rates and faster system response times, moves that will help to optimise trading activity at the operational level. Co-location is an additional service provided by Eurex to support member firms in optimising their transaction response time.
The optimisation of various different software components has always allowed Eurex to considerably reduce system response times and to boost the throughput of the entire system. These measures will enable the Eurex platform to offer substantially faster response times and to process a transaction volume of more than one billion quotes a day.
In addition, in February Eurex launched a fee rebate program aimed at boosting proprietary trading which includes volume discounts for exchange-based transactions in key Eurex product groups.
HW: To what extent do algo traders and market-makers overlap?
MP: The trading motivations of market-makers and algo traders differ in certain aspects. Market-makers supply liquidity and transparency within a certain framework under all given market conditions.
Algo traders are considered to have a much wider playing field in terms of their strategies, which could be similar to market-making, but they are not viewed as liquidity providers under extreme market conditions. In general, both improve the quality of our order book, facilitate execution and help to lower overall volatility.
HW: To what extent do you design new contracts with algo traders and prop shops in mind?
MP: We design all our contracts in close co-operation with representatives from our product users, including the major investment banks, institutional investors, proprietary trading firms, and market-makers.
Since algo traders usually enter an electronic marketplace where a highly liquid product is already available, they are involved during the initial phase of designing a new product when necessary. The needs of a proprietary trading firm are different, and we listen to the comments from representatives of the proprietary trading community.
In principle we are always open to suggestions from the industry based on product user demand to improve our existing product range as well as further extending our offering with innovative products.
HW: How might the needs of prop shops alter trading in the future, for example through smaller tick sizes?
MP: It is always difficult to predict the future, especially in an environment in which an exchange is obliged to take the interest of all its users into account. We are always in the process of trying to optimise our products, and two of the more significant changes were the successful reduction of the tick size of Euro-Schatz derivatives to further simplify the roll procedure.
Changing the size of a contract is one measure to attract new users, but there are other opportunities provided by Eurex to meet the demands of proprietary trading firms.
On February 1, Eurex launched a fee rebate programme designed to boost proprietary trading that includes volume discounts for exchange-based transactions in key Eurex product groups. The program offers rebates of 10, 20 or 30 percent for volumes exceeding product group specific thresholds.
As far as the globally traded Euro-Bund Future contract is concerned, this corresponds to a reduction from EUR0.20 to EUR0.14 per contract in the highest discount category, giving high-volume proprietary traders another opportunity to be rewarded for their trading activities.
Finally, during 2007 Eurex is offering an incentive package which makes direct market access more attractive and simplifies access for proprietary trading firms. The initiative exempts all new participants admitted in 2007 from both the minimum transaction fee and transaction fees of up to EUR3,000 per month for the first year. New trading participants will also be offered training programmes on a free-of-charge basis, up to a pre-defined amount.
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