Cboe Europe Equities First Quarter 2022 Update

Cboe Europe Equities’  first quarterly newsletter of 2022 summarises the team's activities over the last three months and looks ahead to our plans for the rest of the year.

Q1 Market Share Highlights

• Cboe Europe Equities market share (overall): 21.9%
• Cboe Europe Equities market share (intraday): 27.4%
• Cboe Europe Periodic Auctions market share: 78.3%
• Cboe BIDS Europe Above-LIS Market Share: 29%

Market Overview

Europe’s equities market saw elevated volumes during Q1 as investors reacted to the terrible events in Ukraine as well as broader economic fears. European equities on-venue ADV was €58.3bn during the quarter, compared with €44bn in Q4 2021 and €44.7bn in Q1 2021. From a market structure perspective, it was interesting to note how resilient the market share of MTFs was, compared to early 2020 when the pandemic took hold and volumes drifted towards the primary exchanges (see chart below). That said, the collective market share of MTFs has a long way to go to re-scale the heights achieved in 2016, and we are laser focused on delivering the benefits of competition to our members and the investing community – through innovation, better service, and lower costs.

MTF Versus Primary Exchange Market Share (lit only)

From a Cboe Europe perspective, we continued our growth momentum from 2021 into 2022, particularly in the lit segment. Our overall market share, and market share during continuous trading hours, were 21.9% and 27.4% respectively during the quarter. For both metrics, these were the highest levels we have reached since Q1 2019.  

Effective Market Share Campaign

This growth was in part driven by conversations we have had with both buyside and sellside market participants, which lead us to some interesting quantitative research insights:

• When allocating passive/posted volume amongst lit CLOBs (so as to capture the spread), brokers are typically seeking to maximise execution certainty and minimise time to fill an order. This ensures that they minimise the need to subsequently send aggressive flow (crossing/paying the spread).
• When joining an existing European Best Bid (EBB) or European Best Offer (EBO) price level, brokers must determine which queue they can get to the front of the most quickly (a combination of queue length, and the speed of queue movement). Queue length is known, but the speed each queue will move at is not. Many brokers use historic market share (of each venue, in each security) to estimate the rate at which each venue’s passive queue will be depleted by incoming marketable contra-orders.
• Rather than estimate this rate of queue depletion, Cboe’s research sought to measure it - and thereby to understand if/how it can be better predicted based on the size of each venue’s quote (if present at the EBB, or EBO). 
• Our research highlighted that the naive estimation technique (using historic market share) is a very poor approach, and causes brokers to underweight MTFs vs. the execution certainty and speed that they actually deliver. We also found that brokers’ can significantly influence the speed of queue depletion based on how they allocate their passive flow.

Thank you to all of the market participants who engaged with us on this, and other topics during the quarter – with particular thanks to those who have incorporated the results of our research into their passive posting strategies. 

Product Updates

We unveiled a new brand for our European block trading service in February, which is now called Cboe BIDS Europe – replacing Cboe LIS. It was a small but important change for the business and ensures we leverage the strength of both the Cboe and BIDS brands as we continue to expand our block trading offerings, including into new geographies.

The platform started 2022 strongly, with average daily notional value traded of €624 million during Q1 – a new record – and a 29% market share of above-LIS trading during Q1 (source: big xyt). It was the largest platform of its type across many key markets during the quarter, with its above-LIS market share - and rank among like-for-like platforms – as below:

• CH20: 28%, 1st
• ES35: 36%, 1st
• IT40: 31%, 1st
• DK25: 30%, 1st
• FI25: 30%, 1st
• NO25: 28%, 1st

We continue to see a strong pipeline of European, US and Canadian buyside clients set to join the network in the coming months. Cboe BIDS Canada went live at the start of February and expansion into Asia-Pacific, starting with Australia, is scheduled for early 2023.

Cboe Europe Periodic Auctions continued to grow throughout the quarter, with its market share as a proportion of all orderbook activity increasing to 3.4%, compared with 3.2% in Q4 2021 and 3% in Q1 2021. We are planning to introduce a new Accept or Cancel (AOC) order type for periodic auctions in May, allowing firms to search for price-improvement and additional liquidity before executing at the far touch. This feature will help periodic auctions support a wider range of trading strategies, to the benefit of end investors.

Regulatory Updates

On the regulatory front - and sticking with periodic auctions - we were pleased ESMA chose, at this stage, not to go ahead with changes to pre-trade transparency for these mechanisms as part of its RTS 1 review (final report here). As ESMA states in its report, most market participants – including buyside firms - believe such changes would have damaged the usefulness of these systems and could have led to flow being diverted away from EU venues. What is particularly encouraging is ESMA’s recognition of the benefits, in terms of market impact and execution quality, that these mechanisms deliver to institutional investors, particularly those less well-equipped to execute in low latency continuous environments.

We hope European regulators will take a similarly considered approach to any decisions to restrict venue choice as part of the MiFIR review. We have continued to push this point in our meetings with policy makers, as well as provide our thoughts on the consolidated tape (CT) proposals. You can read a Q&A between Natan and Stephen Fisher from BlackRock on some of the changes we’d like to see to the CT proposals in an article in The Trade here.

In short, Cboe believes that a realtime pre-trade and post-trade tape is essential to making the EU a single investible/tradable universe, and that a CT can be established in way that will bring material cost savings to data consumers. The CT should also seek to fairly recognise and reward contribution to price formation from all different contributors.

Even if there is no mandate for the contribution of pre-trade data (quotes and indicative auction prices) by venues, we believe it should not be prohibited. A well-designed revenue-allocation model would lead a combination of pan-EU MTFs and a subset of national exchanges to willingly provide their pre-trade data, and having (even a subset of) pre-trade data live from the outset will make the CT a more attractive and more commercially viable proposition.

We have prepared a FAQ (link here) on some of the key MiFIR issues and welcome your feedback on this, or indeed any other points we’ve raised.