Only a few years ago, Euronext derivatives appeared a sleepy exchange – unable to deal with a new contender. Things have changed. TOM, aka the Order Machine, is in vulnerable position. It is up for sale as the owners can’t decide on the strategy. Euronext moved forward to spoil the sale of TOM.

In an ordinary notice (pdf), the exchange announced a client rebate scheme. Euronext will rebate all exchange trading fees above a certain monthly threshold. For stock options, the threshold is set at 200.000. These are contracts traded on client accounts. Liquidity providers can’t apply for this discount. The threshold for index options is lowered from the current 115k to 100k contracts.

Amazingly, the rebate scheme will be in place for two years. That’s unusual, it runs until December 31th, 2018. Euronext is saying “we are determined to defend our market and we are not afraid to be aggressive“.

Aimed at Binck

Only large brokers reach these volumes. DeGiro is the largest broker, and it certainly profits from the discount. Good for them, but from my perspective that’s not the idea behind the rebate scheme. Binck and possibly ABN AMRO trade enough volume as well.

But both of them execute on TOM and don’t get any volume rebate. Instead, as shareholders of TOM, they have to write checks every quarter to keep the business running.

Pressure on TOM

ABN AMRO and Binck could ditch TOM and switch to Euronext. In the short run, that would be a financially sound decision. One write-down, no more costly deposits for TOM and an attractive rebate scheme at Euronext. In the long run, Euronext may gradually raise prices again.

Potential buyers of TOM will be disturbed. They will notice they are dependent on the commitment of Binck and ABN to stay onboard. And both of them received an attractive proposal from Euronext. How loyal are they? Second, the only way TOM can counter the rebate scheme is to introduce something similar. That will be a burden on the profitability. The conclusion could be that TOM will never be profitable with these prices.

Euronext show themselves to be a fierce competitor after all. You could argue Euronext is cutting fees, to drive a competitor out of business. TOM will certainly be looking at this. However, this is a long shot and Euronext will stay on the safe side.

Best of Book

On the cash market, there is movement as well. Euronext introduced a Best of Book idea. Liquidity providers will quote stocks for retail investors only. These retail liquidity providers commit themselves to quote at least the EBBO (European Best Bid and Offer) of all lit venues.

Retail investors who want to cross the spread, get a better deal. Also, investors are certain there isn’t a better price somewhere else (like BATS). Four years ago this was proposed as “retail matching facility“. Wasn’t enthusiast at the time.

Right now I see the possibilities. Achieving best execution was never so easy. On the downside, the regular book could be less liquid and some questions are still open. If the regular book and the “best of book” market are the same, who is first in the queue?

Jack