Euronext’s expanding fixed income offering is creating opportunities for trading that have never existed before.
Alessia Baccalaro, Head of Group Fixed Income Retail Markets at Euronext, tells us how the combined operations of the Euronext Group are creating unprecedented opportunities through a combination of innovation and scale.
How is Euronext’s fixed income offering evolving?
We are centralising our activity on a single platform, Optiq, that is bringing together markets with very different characteristics. For example, on Borsa Italiana markets, trading volumes are largely focused on Italian government bond activity and typically see €1 billion notional traded every day.
The wider business has seven markets: Amsterdam, Brussels, Dublin, Lisbon, Milan, Paris and Oslo with over 53,000 listed bonds and 4,800 issuers from over 100 jurisdictions, while today we have 102 members of the exchange group which includes 32 liquidity providers.
By bringing this together on Optiq we are creating the leading market for odd lots and retail flows in the European environment onto one single platform.
What advantages is this creating for members?
The main advantage is the possibility to have cross membership, whilst leveraging the same technology to access all of our markets. This means members can access a larger pool of instruments as there is very little overlap between bonds listed on the different markets.
In terms of instruments our legacy markets offer all European government bonds notably from France, Belgium, The Netherlands and Portugal, as well as credit bonds and we are enlarging this perimeter with government, corporate and supranational bonds traded on Borsa Italiana’s markets.
There is also a great diversity of member organisations in our markets with very little overlap between our trading member firms.
Having different counterparties engaged will enhance liquidity. For example, talking about euro govies, we are expecting the most important banks covering that sector on our markets to be more active and crossing over into the wider pool of government debt available which gives their clients greater pricing and liquidity access. This provides the possibility to reach into a deeper book in terms of buy and sell orders.
Still, should there be an interest from our trading members, Euro TLX, the multilateral trading facility (MTF) managed by Borsa Italiana, supports pan-European bond trading via mandatory LPship.
How will these changes impact trading activity?
The key difference will be in the efficiency of trading a larger pool of instruments. Our Optiq system delivers a high-performance trading process minimising friction in execution. This helps optimise the automation of trading as fixed income is moving in that direction, and use industry standards to reduce customer on-boarding delays and expand the widest access to trading desk technology.
It is also delivering new functionality, such as the request for quote (RFQ) trading protocol that combines central limit order book prices with RFQ quotes meeting best execution requirements. This functionality is key as it’s requested by institutional investors. RFQ is not pioneering but is something that we have to offer in order to have the full suite of protocols on one single trading platform for all types of investors.
Having many different types of investors contributing to the liquidity of single instruments, from retail investors via their online banking accounts, institutional investors and funds connected via market members, regional and global banks allow our members to benefit from a real all-to-all market. In a single order book, members have access to different types of investors and trading members. For the most liquid bonds, they benefit from a full market depth thanks to the active contribution of those different investors.
We are also adding to our global model a new primary market distribution functionality, which is accessible directly through the secondary market platform. This feature is currently used by the Italian Ministry of Economy and Finance to raise hundreds of billions of euros and represents a valuable access to new issues.
What difference will the primary market distribution tools make?
This innovation is unique. In the European environment our distribution service gives the possibility to use the secondary market platform to place new bonds from the issuer side, and for market members to buy new issuances on behalf of their clients, or for their own account. We have had this in Italy for corporates and for government bonds, and we are now expanding the functionality to a larger set of issuers in Europe, via the other markets that we’re covering with Euronext.
Thanks to our cost efficient straight-through-processing, this distribution service links directly with the settlement system, with all the trades settled in our central securities depository (CSD). Then our members have an immediate access to these bonds on the secondary market with identifiers for firms to process trades within their order and execution management systems.
How else will this impact the total cost of trading for members?
In addition to the harmonisation of our trading technology, the objective is also to harmonise our post-trade processing to prevent it being a barrier to trading on our different markets and the development of cross-membership, and in the end to reduce total costs. The first stage is on-going with the migration of Euronext legacy to Euronext Clearing by Nov 2023 and further harmonisation steps will be studied afterwards.
During the post migration year, we will also be introducing fee incentives for new trading members and cross-members and an optimised fee schedule for trading firms to encourage liquidity provision.
Nathalie Masset, Head of Fixed Income at Euronext, announced before the summer that, after managing the Fixed Income franchise for 12 exciting years, she will start an end-of-career leave in October 2023 (but still attending FILS & ICMA conferences). She is now passing on the torch to the Group Fixed Income Retail Markets team based in Milan and Paris and led by Alessia Baccalaro.
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