(Bloomberg) — The zero-day options trade that has roiled Wall Street will finally reach Europe next week, in a new test for capital markets in the long-suffering region.
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Starting Monday, Deutsche Boerse AG subsidiary Eurex will list expiring Euro Stoxx 50 (SX5E) derivatives every weekday, following its US counterparts which offered the now booming contracts linked to the S&P 500 index last year. In each trading session, investors in Europe will be able to buy and sell derivatives that expire on the same day, known as contracts with zero days to expiry, or 0DTE.
Its introduction unleashed a torrent of commercial activity on the other side of the Atlantic, with individual and institutional investors using it as a tool for speculation and hedging.
At one point this month, 0DTE accounted for a record 55% of trading volume for options linked to the S&P 500 index, according to data compiled by Nomura Securities International. Derivatives have grown in popularity to the point that some now fear they will affect the US equity measure itself.
In Europe, the level of demand for contracts will be watched closely by participants looking for signs of life in the moribund market. But amid chronic underperformance of equity benchmarks, dwindling stock listings and stagnant volumes, options face an uphill battle to have an impact.
“You don’t have the same kind of pent-up demand,” said Kieran Diamond, a derivatives strategist at UBS Group AG based in London. “The S&P has a very strong track record as the primary global liquidity pool for equity volatility.”
As of Tuesday, the average daily notional amount of Euro Stoxx 50 options traded was $45 billion over the past month, according to data compiled by UBS. For the US index, the equivalent figure was about $1.3 trillion.
Diamond noted that even before the addition of Tuesdays and Thursdays last year – allowing trading of S&P 500 products that expire every day of the week – weekly options were growing in popularity in the US. In contrast, activity in options linked to the SX5E is primarily focused on monthly contracts.
While the new expiry times are unlikely to generate a frenzy to match the US, they could still raise trading volumes, with trading professionals being the main users, according to Patrick Bonofre, head of European index derivatives trading at Optiver BV. .
“There has been a clear trend globally of investors showing greater preference for shorter-dated options,” Bonofre said via email. “Daily options allow very specific risks to be hedged – such as European Central Bank events – that previously could not be hedged with the same precision.”
Eurex had previously said that the new contracts are in response to the increasingly strong demand from institutions for more options with short-term expiration. Along with the introduction of daily expiries, derivatives will now also settle at the stock market close of 5:30pm CET, instead of the current midday settlement. This will allow for a greater range of trading events during the market day.
However, the new derivatives are unlikely to garner much interest from retail investors. The exchange that was at the center of the frenzy said this week that day traders have turned out to be a prominent driver of the 0DTE boom in the US. But overall retail participation in the stock market is much lower in Europe than across the Atlantic, simply indicating a lack of a major source of demand.
For some, that may not be a bad thing. US strategists speculated that 0DTE activity was now so great that it could move the S&P 500 index, as option traders rush to hedge their own positions while traders aggressively buy and sell contracts in response to intraday volatility.
All of this has become a topic of heated debate with no end in sight – of which Europe is unlikely to be a part anytime soon.
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