A Look Under the Hood at Where all the Major European Companies Trade

How Eurex managed transatlantic volatility resulting from the US regional banking crisis. IBKR’s Edward Strauss drills down into European retail and institutional trading patterns with his guest from Eurex, Eugen Mohr.

Note: Any performance figures mentioned in this podcast are as of the date of recording (April 21, 2023).

Sponsor Information:

https://www.eurex.com

https://www.deutsche-boerse.com/dbg-en/products-services/ps-indices-analytics

Summary – IBKR Podcasts Ep. 76

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Edward Strauss

Welcome to this IBKR podcast episode. My name is Edward Strauss of IBKR, based in our Swiss office, and today we want to explore international, or more specifically European trading possibilities. With this, we’re happy to have our guest Eugen Mohr, who’s been with the Deutsche Börse group for over 16 years and is currently the Senior Vice President for Equity and Index Sales at Eurex, a leading European derivative exchange to speak about international or more specifically European trading possibilities. Thanks, Eugen, for joining us today.

Eugen Mohr

Hey Edward, thanks for having me and yeah, also to the audience, a big hello. I’m looking forward for our podcast today, thanks. Before I start, I mean, you’ve made a little intro about myself, so 16 years with Eurex having various positions at the exchange, working in the operations team, that’s day-to-day business, lately in the sales business development team. I’ve been in Chicago, in London, so have quite a good background about the exchange I would say.

Edward Strauss

As you know, so IBKR we’re a global broker, right? And we are the professional’s gateway to the world’s markets. So today again we want to take that opportunity to speak a bit about the international opportunity’s investors may want to consider. Basically, US investors are familiar with the Dow Jones industrials, the NASDAQ and S&P 500 indices but also the US large CAP brands and heavily traded equities such as Microsoft, Google, Tesla and so on. There are also many large European or German companies such as Adidas, Mercedes, Deutsche Telecom, BMW or SAP, but also other European global firms such as Shell or Nestle. These companies are also components of the major European indices. So, for the German companies, this is the DAX or the German Stock Index, or the European, the EURO 50 Index. So, can you give some more color as to the relative importance of the DAX and the EURO STOXX 50 Index for European or non-European investors?

Eugen Mohr

Eurex is the biggest European Derivatives Exchange, we’re headquartered in Frankfurt, so our mother company is Deutsche Börse Group. Deutsche Börse Group consists of the derivatives trading but also cash trading, clearing … so we build up the whole the whole value chain. Just to give the audience a little bit of background about who we are. In terms of the product portfolio, and you mentioned it, I mean one of our benchmark products is the EURO STOXX 50 as you said it, consisting of the 50 biggest companies in Eurozone based on market cap, and from a German perspective, it’s the DAX.

I mean, the DAX is a well-known index. Previously it was the DAX 30, last year the DAX has added 10 more shares to the DAX 40 and that consists of the 40 biggest companies in the German region based on market share. Compared to the US indices, Germany is the largest economy in Europe, therefore also the Dax and in particular the EURO STOXX, is a very important trading product for us, especially the EURO STOXX 50 Futures. It’s actually the most traded future contract at Eurex and yeah, this is one piece of our big product suite.

Edward Strauss

Ok, very good. You know, obviously equity ownership and culture in Europe was not that developed just even a few decades ago. Can you explain the emergence of the European retail investor in the past decade? Basically, how is Eurex responding to their needs?

Eugen Mohr

That’s a great question. I mean, everybody speaks about the increased activities of retail investors. Eurex itself was not a retail exchange. We were purely an exchange for institutional investors. Eurex is a relatively new company, we were founded about 30 years ago, in the early 90s. Back then, this was under the name DTB, Deutsche Terminbörse, and the special thing about DTB Eurex was that we were the first fully electronic exchange.

I mean, back in the 90s, even in the 2000s, there were a lot of pit trading on the established exchanges in the US, but Eurex never had a trading floor. Eurex was from day one a fully electronic exchange and therefore, we have a sort of pioneer role in the exchanging world driving the market and changing the market to create electronic markets and yeah, being the leader on the forefront of the trading industry now. So that’s a little bit more on the background side.

Edward Strauss

Now you’ve always been known to be one of the more innovative ones out there, right? I understand that you spent about four years working for Eurex in Chicago, right? Can you compare and contrast the appetite from international investors for US versus European investments? So, basically how do US and European investors differ and if they do, why do you think that is?

Eugen Mohr

So that’s another great question, but maybe I need to get back to the to the retail part, which I missed out previously. So, I said initially we are a pure institutional exchange, but given the demand from end clients, from smaller end clients into the trading segment … also Eurex, here as a European innovator, was launching a retail initiative.

The retail initiative itself was that we have broker agreements around the globe, I mean Interactive Brokers for example, is a very important partner for us and the focus on those broker agreements is on education. Yeah, to educate the end client and to bring them on top of the product and in particular also to update them on potential risks, everything related to it now. So, this is an important topic, this is an important point on our agenda, and we continue to work on this.

I mean, education is one part, the other part of course, importantly is also the product suite of course. But when we look at the DAX, the DAX is a is a relatively index heavy product. I mean, the DAX itself has about 15,000 points and the original DAX future contract had a contract value of €25 per point. That means when you trade one contract, this is 15,000 points times 25 euros. That makes it in terms of trading, a very heavy product and also in terms of margin requirements. And therefore, the exchange in line with the retail strategy, we introduced smaller contracts with a reduced contract size. First, the mini-DAX with the contract size of €5 and two years ago, a micro-DAX with a with a contract size of €1 per index point.

To fulfill the requirements … when it comes for the needs of the customers, especially between Europe and in the US, I would say there are some differences. I would say, I mean, I said I was four years in Chicago, so I have a little bit of a background. I would say there are some cultural differences. I mean Europe or in Germany in particular, the German investors are relatively conservative. We still have, I think, in the whole Eurozone, the lowest number ratio of equity of stock investors compared to the to the amount of people who live in Germany. And the savings account is still the most relevant investment that German investors are using.

Edward Strauss

That’s true.

Eugen Mohr

That’s because they’re just very afraid of losing money and that’s why they go to this conservative way.

Edward Strauss

We’ve seen the low interest rates over the last couple of years.  Now things are rising, but even during the low interest rate periods, it’s clear that there’s a lot of the retail investors that even stuck with their savings books.

But going back to Eurex products, I mean as you mentioned, Eurex is part of the Deutsche Börse group right, that has the underlying and a lot of those other products out there that try to give those investors the access to the indices, the different ETF products out there from the different providers. One has to know that those providers, the big guys, they’re really going to Eurex to hedge themselves to do a lot of their main business, right? So, I can imagine that. But basically, when traders or investors, they think of Eurex they immediately think of the exchange as being sort of “home” to the institutional fixed income trading, right?  We haven’t talked about fixed income, but this is basically for the last 30 years. Can you explain a little bit the journey of the exchange? You had said before it started out as electronic, but why is it so entrenched in the bond markets?

Eugen Mohr

Yeah, I mean it all started, I said in the 90s as a startup and one of the first products that we had was the future on the German government bond, the Bund. We have three products on that. The Bund future which is like the 10-year government bond. The BOBL, which is the 5 to 6-year and the and the Schatz which is the 2 to 3-year.

Historically, also here in the 90s, the market in the government bond futures was in London on the live market. Those guys have been trading at the pit for a very, very long time. They had the book; they had the market. However, it was the goal from Deutsche Börse DTB to bring back the Bund. To bring it back home and therefore we had the superior technology with all the advantages. No, I mean you could execute the trades with more efficient terms, execution quality in terms of pricing, I mean, and trade executed over an electronic platform is way or was way cheaper than over floor trading. And therefore, this was a big move in the mid-90s and we quickly, I mean as I said, with all the advantages: having a superior system, having the price advantage on the fee side, we were able to migrate or bring back the German Bund future to Eurex and this was like the first exclamation mark for Eurex.

Edward Strauss

I mentioned at the beginning of the podcast that it could be that some investors may not give that much thought to investing overseas because they just might not be familiar with it. That’s obviously going back to the retail side. They might even not know where some of their, you know, favorite brands or companies are listed. So, for example, I had an acquaintance in the States that lives close to a large BMW plant in South Carolina, he wanted to invest in the company. But his US online broker didn’t offer the original share, but rather just the ADR, a lot less liquidity and whatnot. Can you identify the challenges for investors investing overseas?

Eugen Mohr

Dax consists of assets of the 40 biggest German companies. They are brand names who the whole world names, especially on the carmaker side. Let’s say the Spence BMW, Volkswagen. So, this is a selling argument for us to advertise our products in regions outside of Europe and in particular in the US.  Investment in the US, however, is connected to a certain level of specialty. So, when you would like to offer investment products in the United States, they need to go through the approval from the SEC. So, this is for from the equity side, the SEC, and for the future side from the CFTC.

So, this is the local regulator in the United States. The United States regulators have certain level of restrictions in terms of what foreign investors can offer to clients in the US.

And for example, equity options which fall under the SEC regime unfortunately cannot offer to US investors and also certain types of equity index futures depended if they are broad based or narrow based are also excluded from product offering.  So, we have limitations to offer our products, but the products we have, they are widely accepted, and we have an increasing market share in the US market because the US investors also need to diversify their portfolios and therefore Eurex is the gateway to the European market, to the German market and therefore these are the products that we can offer are pretty prominent.

Edward Strauss

Well, obviously it’s a derivative exchange, right? So, we’re talking now for the Eurex point of view. It’s, you know, the futures, the options this kind of stuff and that’s clear that those can’t be all from the Deutsche Börse side.  For the underlying, that that you know US investors can actually take advantage of that. You know having fulfilled all kinds of appropriateness check. And whatnot. Unlike other online brokers in the US that have solid offerings in their home countries, IBKR offers access to stocks that in over 15 markets, 33 countries. You know, fees are transparently listed, and the currency exchanges can also be done with, low commissions where the spread is not. But basically, going back to how Eurex and how it is massive in derivatives trading. Can you put some volumes into perspective for European traded products? Perhaps, tell us about your biggest trading day or highest volume or what basically what happened on that day? I understand it was actually just recently.

Eugen Mohr

Yeah, exactly that. That’s a timely question we had in February, March, we had the turmoil in the banking sector, with Silicon Valley Bank, with the takeover from Credit Suisse by UBS, I mean these external market effects have an impact on trading volumes of course. These market impacts affect volatility and volatility of course, at the end of the day, it affects trading volumes.  On average, at Eurex, we’re trading about 7 to 8 million contracts a day over the whole product suite. So that’s equity products, index products, fixed income products, volatility products, dividend products, so about 7 to 8 million per day. However, in those volatile days, and here was one thing that needs to be mentioned, we had the volatility situation because of the bank’s problems and then, at the same time, there was expiry in March.

Edward Strauss

That was a big one.

Eugen Mohr

So, we have the quarterly expires where the futures expire, and this was like a combination with ended up having at the exchange the three biggest trading volume days in exchange history. So, we traded I think over 20 million contracts a day versus the seven million on a regular day.

But since our system, and that’s another thing to mention, Eurex is not only an exchange but also a software provider. So, we develop our own trading platform and since Deutsche Terminbörse is at a software provider, we have a state-of-the-art trading platform. And even on those high load days where you have 20 million traded contracts where you probably have hundreds of million quotes and trade updates, the system never run out into any problems and could operate still under the lowest latency levels, which is in today’s world for investors, for market makers, a very important factor to keep the latency low. But yeah, system proved even under high volatility days, worked out perfectly.

Edward Strauss

Yeah, it is indeed impressive. And in looking at, you know, some of the recent turbulence in the banking sector, we saw that although perhaps unrelated to the challenges US banks are facing with rising interest rates, events in Europe such as the recent Credit Suisse takeover by UBS. How do events like this affect the volumes in the Eurex sector and indices? Or, in this case specifically, maybe the Euro Stoxx Bank index?  

Eugen Mohr

Yeah, that’s a that’s a good point. So, next to the Euro Stoxx 50, which is the index for the 50 biggest companies in Europe, we’re having sector products, sector indices. What Is the sector index? The index provider stocks QONTIGO is calculating for every industry sector as separate index. So, we’re having the banking sector. We’re having the automobile sector. We’re having the chemicals, financial industry sector and I think we’re having about 24 different sectors and of course we’re also having a respective futures on it.

What is the advantage of investing into sectors? I mean, diversification is key and investors professional as well as private investors need to invest on diversify in in certain areas and therefore investing in a well-diversified sector index is capital efficient and fulfills the requirement of the of the individual investor.

Coming back to the to the banking sector, the banking sector index it’s called FESB. The banks sector future is one of our most liquid products next to the Euro Stoxx.

And why is that? Starting with the financial crisis in 2008, there was a high focus on the banks and, therefore also, this explains the increasing volumes.  Also then of course, the need for such a future for investment strategies, but also for arbitrage strategies, and most importantly, also for hedging strategies. So, the banking sector index is another innovation from the exchange. We’re one of the first sector providers in the world here again. And yeah, we developed over time successful sectors and provide liquidity to the market in all those sectors.

Edward Strauss

I can appreciate that, and you can see that having been innovative again, a lot of other competition out there, probably try to copy it and emulate it. But obviously we know there’s a lot of the good portion of the volume is on the Eurex, right? So, is there anything that you’d like to bring to our listeners attention or anything important investors should be aware of or consider in addition to what we’ve discussed today?

Eugen Mohr

Maybe, to sum it up, I mean, as I said, Eurex was the first electronic exchange.  So, we are an innovator in on the technology side, but also on the product side.  Right?  I mean, we just elaborated on the different products that we have, but another advantage I would say of a regulated exchange, is just the fact that we are regulated by the local and the European regulator.  So, we have a reporting line to those regulatory bodies and then on top of it, we have an internal surveillance team as well, which looks over the trades and makes sure that the investors have a fair and orderly market.

I think this is this is very important, especially in volatile times. And another advantage I think of listed exchange like Deutsche Börse Eurex is just the fact that we have a so-called central counterparty system. Central counterparty is important when you have a defaulting member because the central counterpart of the exchange guarantees every buy trade and every sell trade. So, if someone buys a future and someone sells a future, then those parties don’t trade against each other. Everybody trades individually versus against the exchange. So, the buyer trades against the exchange and the seller trades against the exchange. So, the exchange guarantees payment and the delivery, and even if we have a default like we had 2008 with the Lehman insolvency, then even those trades from the departing member are guaranteed by the exchange. Technically, it will be when a member is default, the Member will be set to hold.  ll positions will be put into an exchange account and the Member will be liquidated as soon as possible. But very important, all trades stand and all trades are guaranteed.

Edward Strauss

We’ll look, we’re in that time again. We’re obviously risk is on the high radar screen of everybody and that’s you know that does reduce a lot of the risk, right? And we know that that the size is especially on the institutional side, that’s an important factor. Well, listen again, I appreciate you taking the time today to have this chat with me on the IBKR podcast and thank you very much for your insight. I can imagine that the topic we covered may inspire some of our listeners who the investment possibilities in Europe, and I appreciate it again your time. Thank you.

Eugen Mohr

Exactly. Yeah. And also, thank you for your time and for interested investors, please visit Eurex.com.