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In a bid to further improve liquidity and efficiency in its flagship EURO STOXX 50® Index Options (OESX or SX5E Options), Eurex launches a first-of-its-kind liquidity provider (LP) program in July, built on the principle that ‘a good quote is a traded quote’. The scheme has received widespread support from the market-making community.
"We're excited to see Eurex pursuing such ambitious changes for its flagship product. For the market at large, the best quote is one that actually trades, and this is what this program for liquidity providers incentivizes and rewards," says Patrick Bonouvrie, Head of Index and Rates Options at Optiver. "We’re optimistic that this is a positive change towards bringing new flow and more diverse participation into the market."
The new framework is designed to challenge the traditional approach to liquidity provisioning programs by prioritizing time-weighted quality of quotes instead of performance against requirement thresholds, which is typical in most liquidity provisioning programs. The framework incentivizes individual excellence and provides opportunities for specialization among liquidity providers, leading to a broader and stronger liquidity picture for end-users.
"Maven is excited about the new OESX Liquidity Program and its potential to enhance market dynamics. By increasing on-screen liquidity and recognizing consistent, competitive quoting, this initiative marks a significant step forward for European derivatives markets. We are optimistic about the positive impact it will have on both end-customers and the broader market," says Felipe Morales, Corporate Development at Maven.
EURO STOXX 50® Index Options are among Europe's most liquid and well-established listed derivatives contracts, boasting a trading history exceeding 20 years. As markets evolve, enhancing liquidity provisioning programs is essential to keep them aligned with today’s market demands. As Eurex seeks to attract new participants to the product, it aims to implement a new scheme that provides broader liquidity across the EURO STOXX 50® Index Options ecosystem.
Sergio Tam Suárez, European Market Structure at IMC, says: "IMC is excited about the upcoming changes to the OESX LP scheme and its potential to develop more attractive trading conditions for end-customers. Greater competition amongst liquidity providers is the start to enhancing both spread and volume quality on-screen, bringing more transparency and growth in trading volumes. Given the stagnation in European volumes compared to the U.S. and the lack of improvement in screen participation, this initiative comes at the right time."
The structure of the European option market can be challenging, especially for firms engaged in the U.S. index options markets. Although European and American markets share significant liquidity at the core strikes, out-of-the-money strikes and longer-dated expiries are quoted less frequently in European order books. This results in a lack of a continuous external price picture, and these trades often occur in off-screen blocks market.
Eugen Mohr, Senior Vice President of Equity & Index Sales at Eurex, says: "One of the goals of the new liquidity scheme is to provide a continuous and comprehensive external liquidity picture in a wide range of instruments. This scheme aims to attract new customers to the market, for whom a solid order book liquidity picture and the ability to fully execute transactions electronically are essential components. The goal is to eliminate entry barriers and appeal to a broader end-user base."
The market structure for options trading in Europe has created barriers to optimizing liquidity - especially for customers unfamiliar with its mechanics. The two-tiered market structure has resulted in disparities between visible and available liquidity, with a significant portion of transactions occurring off-book and LPs primarily facilitating trades through Immediate-or-Cancel orders rather than visible quotes. Orders executed against the quotes remain the minority. The new liquidity scheme aims to tackle these issues and better reward high-quality liquidity provisioning. Its goal is to boost overall trading volumes by attracting new customers and making trading easier for existing participants.
Strahinja Trenkic, Quantitative Analyst in Market Development & Pricing at Eurex, says: "We are investing heavily in order book liquidity. This is not just about changing the scheme’s parameters but also about implementing a new liquidity program based on new concepts better suited to the products’ growth phase and current challenges. Our new scheme is designed to incentivize market makers on the quality of the spreads and size they quote."
The new LP framework introduces three key measures: the Basis Building Block, the Advanced Building Block and the Passive Volume Incentive. These will sit alongside the existing Volume Rebate Framework.
The Basis Building Block is designed to light up the screen. It requires quoting all maturities over a wide delta range in the first two years with a 90% coverage requirement. This ensures a consistent and permanent quotation of the entire curve throughout the day in all market phases.
The Advanced Building Block pushes LPs to excel by encouraging them to provide more size and better spreads, ensuring high-quality quotes. This new sliding-scale rebate system rewards LPs based on the time-weighted spread and size provided via their quotes. LPs can choose their desired rebate level and adjust their quoting strategy accordingly. This opens the door for specialization and competition on an instrument-by-instrument level as each liquidity provider attempts to slide their own scale and maximize incentives, while different areas of the curve provide unique challenges in doing so.
Finally, the Passive Volume Incentive introduces the logic that a good quote is a traded quote. It rewards LPs for passive executions, aiming to provide incentives for the highest quality of liquidity provided: the quote that trades.
This component introduces competition among liquidity providers, with a clear aim to benefit end-users by providing liquidity that is appropriate to the market and compensating liquidity providers for the risks they are exposed to when quoting aggressively. The incentive pool will be open to a limited number of qualifying LPs based on their passive volume share. The Volume Rebate Framework remains unchanged, offering rebates on trade size and volume. With the introduction of the new scheme, Eurex will also level the playing field between off-book liquidity providers.
Eurex will implement the new scheme in May 2025. LPs will then have until July to test their systems and prepare for the full implementation on 1 July.
