Cboe Europe Business Update

Natan Tiefenbrun, Head of Equities, Cboe Europe, recently shared a business updated with Cboe Europe's customers to kick off 2022 and provide look ahead at the year to come.

It was a strong year for Cboe Europe’s equities business on many fronts, with highlights including: the successful migration of liquidity in EU securities from Cboe UK to Cboe NL; re-introducing Swiss securities on Cboe UK; an increase in our intra-day market share from 21.6% during 2020 to 23.2% in 2021, making us the largest pan-European equities platform during continuous trading hours; and Cboe LIS, our block trading platform, becoming the largest above-LIS venue for the first time in August. 

Of course, we couldn’t have achieved any of this without your ongoing support, so – from the whole team - thank you. However, there’s lot more we can achieve together as we continue to execute on our longstanding strategy of bringing innovation and cost-efficient competition to the European marketplace.

Lit Books – Upping the ante

Cboe Europe’s market share as a proportion of lit-only continuous activity was 17.8% during 2021, up modestly from 17.4% in 2020, but ended the year significantly higher at 20.9% (December 2021). Two factors laid the foundation for this growth. The first was a renewed focus on increasing the size of available liquidity at the best bid or offer on Cboe's order books through the Additional Liquidity Provider Scheme (A-LPS), open to all participants, and which drove significant improvements in our lit market quality. The second was successfully navigating Brexit, with the migration of liquidity in EU securities from Cboe UK to Cboe NL in January, and the re-introduction of Swiss securities on Cboe UK in early February.

Despite our gains in the last 18 months, collective MTF market share of lit continuous trading has declined over the last five years, from a peak of 43% to 32% recently (having been as low as 26% in March 2020). Not only has this resulted in higher execution costs for market intermediaries due to higher fees charged by national incumbent exchanges, but it has also exacerbated an over-reliance on national incumbents that undermines market resilience to technical outages.

MTF versus Primaries Market Share (Lit-Only)

Source: BigXYT

As a group, pan-European MTFs must be more effective in generating meaningful savings for the industry, and in making equity markets more resilient, by earning lit market share from national incumbents. We take our responsibilities in this regard very seriously and are committed to building on the momentum we generated in 2021 by continuing to improve and promote our lit market quality and by reinforcing the benefits that pan-European operators bring to the market, through innovation, choice, lower costs and ultimately better execution outcomes. Our support for investor choice (in execution mechanisms and in clearing), and for a consolidated tape, is in stark contrast to the opposition of exchanges whose own profitability takes priority over serving investors' needs.

Periodic Auctions – Developing Their Use

Cboe Europe Periodic Auctions continued to grow throughout 2021, with its market share as a proportion of all orderbook activity increasing to 3% in 2021 from 2.5% in 2020. Whilst accounting for a modest proportion of overall volumes, periodic auctions are highly valued by end investors and their execution providers as a model that eliminates speed as a competitive dynamic, minimises price impact, and delivers fair and robust price formation (with particularly low pre- and post-trade mark-outs).

We see the potential for continued growth in 2022, as clients optimise and extend their interaction. As more firms better integrate the pre-trade market data feeds from periodic auctions into their workflow, they can better respond to liquidity opportunities, contributing to still broader based price and size discovery. Following a member consultation, we are also planning to introduce a IOC order type in Q1 – so that firms can search for price-improvement and additional liquidity before executing at the far touch. Together, these initiatives will help periodic auctions to support a wider range of trading strategies, to the benefit of end investors.

Cboe LIS – Number One and Growing

Cboe LIS, our block trading platform powered by BIDS technology, went from strength to strength in 2021. The number of buyside firms on the network increased by 22 to 223 during the year, and were supported by 28 designated brokers. What differentiates Cboe LIS, and has powered its growth, is a broker-neutral, utility fee model that allows the buyside to trade anonymously with one another, and with brokers, whilst being able to select the broker with whom they settle trades and to whom they pay commission.

Cboe LIS became the largest venue for above-LIS trades for the first time in August, capturing 30.6% of the LIS market and went on to become the largest above-LIS venue again in October and November. The platform has the largest average trade size of any conditional block trading platform, with average trade sizes for buyside transactions regularly above €1.2 million. Other notable records during the year included a record trade of €77.8mn on 25 May, and a record day of €915mn on 30 November.

Cboe LIS Average Daily Notional Value Traded and Market Share

Source: BigXYT

Extending our broker-neutral utility approach further, we decided last year to allow brokers and buyside clients to leverage our platform for high touch trading flows. Our Directed IOI service facilitates the delivery of high-touch IOIs from named brokers to their buyside clients – preserving buyside anonymity whilst delivering IOIs in a more targeted manner only to clients with a live contra order.

We also have a strong pipeline of buyside clients set to join the European network in the coming months and the potential client base of the platform will grow further as the BIDS network is extended to new geographies this year, including Canada and Asia-Pacific.

Consolidated Tape (CT)

Policy makers in both jurisdictions are contemplating the introduction of a CT for equities. If it were introduced - and included pre-trade data from each venue, and the indicative auction price - it would finally give all investors a full picture of the European liquidity landscape and a fair basis upon which to make and judge execution decisions, representing a giant leap forward in investor protection. It would dramatically simplify the contractual, technical and usage reporting challenges of sourcing data across all venues. And it would make European capital markets easier to access and more competitive on the global stage – benefiting smaller national exchanges in particular through broader distribution of their prices.

Most incumbent exchanges - whom for years have strongly opposed any version of a CT - now lobby for a delayed post-trade tape only, for a protectionist and distorting CT revenue sharing framework, and for an operator selection process that will maximise costs for consumers. Forcing pan-European venues to subsidise incumbent national exchanges - in contradiction to the level playing field objectives of MiFID I and MiFID II - would undermine competition (to the detriment of investors) and further protect the largest exchange operators that already make >€350 million a year from listing fees and the opening/closing auction fees that are tied to listing.

In our view it is better for a real-time CT to include pre-trade data from the outset, to ensure the operator selection process considers the needs of consumers, and to treat all contributors to the CT fairly - thereby encouraging consumption, boosting investor protection, and supporting competition to meet investors' and market participants' needs - rather than (as currently proposed) to limit the CT to post-trade data and allocate CT revenues so as to further cement the dominance of incumbent exchanges.

Investor Choice is Investor Protection

The EU and UK are also considering changes to the transparency regime and market structure for equities. Both say they want to strengthen the attractiveness and competitiveness of their capital markets – and yet there seems to be significant divergence of opinions on the best way to do so.

The UK has signalled its intention to stick with most of the current MiFID rulebook, including its clear delineation between multilateral and bilateral activities, whilst removing constraints (such as the STO) that might prevent investors or brokers from accessing liquidity in EU venues/SIs. The EU on the other hand, will retain the STO and is considering proposals to diverge significantly from the original principles of MiFID by limiting investor choice and flexibility. The European Commission has proposed measures to dramatically curtail midpoint matching by EU venues (and SIs), whilst ESMA has contemplated measures that would fatally harm the utility of frequent batch auctions - both in the hope that these measures will generate a “transparency dividend” to enhance the role and attractiveness of central limit order books (CLOBs).

There would be no such “transparency dividend”. CLOBs dominate trading during continuous hours – representing 86% of sub-LIS on-venue activity – and are not in need of any “protection”. It is simply not the case that CLOBs are a perfect, or that they are the only legitimate execution mechanism. CLOBs have their limitations, particularly for institutional investors/brokers working large orders, and so in pursuit of the best outcomes for investors, should be complemented with alternatives. Attacking the right of institutional investors to trade at the midpoint (which represents <8%) or to avoid the low latency race by trading in FBAs (which represent <6%) is not going to make a meaningful difference to overall market transparency or to price formation – but will force investors to incur higher spread and intermediation costs.

Moreover, restricting midpoint trading in the EU as proposed would represent a dramatic divergence - not just from MiFID, but from globally accepted market norms. Similarly, eliminating FBAs in the EU by forcing an unsuitable transparency regime on them would directly harm long term investors. Individually or jointly, these measures are contrary to investor protection, and would significantly undermine the attractiveness and competitiveness of EU markets at a time when the UK is heading in the other direction.

Ultimately, Cboe supports an integrated and competitive European marketplace – whether that be by advocating for a consolidated tape, clearing choice, or a diverse eco-system of market mechanisms designed to benefit end investors. We intentionally align ourselves with what’s best for the broader market, and with the EU’s aspirational vision for a Capital Markets Union that helps bring innovation, choice, lower costs and better execution outcomes to end investors.

What Can You Do?

The points above will form the basis of our conversations with EU and UK regulators this year. But don't miss the chance to make your views heard over the next six months - a critical period for the future shape of UK and EU market structure, as the MiFIR review and UK Wholesale Market Review are finalised. You can:

• Share views with your peers, to find common areas of agreement/concern;
• Comment publicly on areas of the reviews that worry you, both through your trade association, but also in your own firm's name;
• Speak with regulatory bodies and policy makers, in particular EU finance ministries and MEPs who will be directly involved in reviewing the MiFIR draft text this year