Eurex: Buxl options: Bid/offer, carry and the buyside view

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Buxl options see steady growth since launch

Eurex’s Buxl future has seen daily volume break 100K a few times over the last fortnight, as the long end of the euro curve has swung wildly on the back of the US elections and positive vaccine news. Thus, with the benefit of 20:20 hindsight, the launch of Buxl options in late September 2020 proved to be well-timed. Backed by eight market makers, aggregate open interest in Eurex’s Buxl options has been climbing steadily and daily volume in the options recently tested a new high.

 

 

A couple of weeks after the launch Lee Bartholomew, Head of Derivatives Product R&D Fixed Income at Eurex, described some of the key use cases for Buxl options (link).  In this article, Total Derivatives talks to two market participants about their experiences with the product so far.

 

Buyside active, uses options for carry

Hendrik Tuch, Head of Fixed Income at AEGON Asset Management, reckoned that his firm had been one of the first asset managers to trade the product – despite some fleeting teething troubles with the Bloomberg pages on launch day. He added that he was a strong supporter of Eurex’s innovative approach, citing its successful launch of options on BTP futures as an earlier example.  

 

Would AEGON use Buxl options in its strategies? “Absolutely,” Tuch confirmed, explaining that the firm’s active funds would use the options both for hedging and to get carry.

 

Indeed, given the “squeezy” market conditions at the long end of the German curve, another potential pool of liquidity is welcome. Low supply of 30y Bund had combined with ECB asset purchases and a large base of buy and hold investors to produce very large moves in the cash and the Buxl future at times, even as 30y Bund yields head back up towards zero per cent.             

 

Long end activity growing through the brokers

Tuch said that AEGON usually found their best prices for the options by dealing with their investment banks.  However, other players will go through the brokers. Like Mark Pearson, senior broker at GFI’s listed rates brokerage desk for Europe, who told Total Derivatives that he welcomed the decision to launch the product as a natural extension of the growth in activity at the long end.  

 

“Buxl futures have become more liquid as rates trended lower for longer and investors looked at longer duration exposure for yield pick-up,” Pearson explained. “It was a good time for Eurex to launch with Buxl yields hovering around zero percent. We now have a market for volatility trading for the entire German curve.”

 

He said that GFI was seeing a growing number of inquiries from clients interested in trading the options. “Hedge funds triggered most price inquiries in the broker marker so far,” he said. These were “mostly” European based funds with a global macro or a discretionary background. “We’ve also seen interest from asset managers and a few insurers looking to extend their options trading into the longest-end,” he added.

 

At AEGON, a key use case for the options is as a means of extracting carry. “We might play the range,” Tuch explained, selling puts and calls as the Buxl future tests the edges of the range.

 

Pearson said that GFI had, broadly speaking, seen more puts than calls trading in the current environment.

 

“A number of the trades done were multi-leg or skew sensitive, for example put spreads and butterflies. There were also some curve trades for the 10s/30s longer-end of the German yield curve.”

 

Interestingly, he had also seen interest in cross-market trades. “The US election and the 2nd wave of Covid-19 brought both uncertainty and opportunity, so that strategies between US Treasuries and the German curve came into play as well,” he said.

 

Pricing seen fair

What about pricing for what is, after all, a very new product? Screen offer pricing for STP, point and click execution is in sizes between 50 and 100 contracts, according to Eurex. Spreads are somewhat wider than for Bund options, but that is probably to be expected as the options are less than two months old and open interest is still growing.  Bid-offer spreads are 7-15 percent wide depending on the moneyness of the options, and clients have successfully found matches by entering mid-market orders.

 

Tuch said that AEGON had been able to trade “multiples” of the sizes quoted at best bid-offer, as market makers replenished quotes or traded against its orders with electronic eyes.    

 

GFI speaks to the eight market makers in Buxl options and reckons to get prices 1-3 ticks wide in sizes of 50-200 lots per price provider, according to Pearson. “The results of the phone market price auction often yield tighter pricing, especially for more finessed multi-leg strategies with lower delta exposure,” he noted.

 

“We have also found solutions to help clients trade yet larger sizes at attractive bid-offer spreads despite the constraints market makers may face when looking to hedge deltas in the Buxl futures for hundreds of contracts in one go.”

 

As for the relevance of on-book quotes for price finding and end-of-day risk markings, Tuch said that although the firm had been able to get better prices for the size it wanted, overall pricing on the screens was “fair” and AEGON got sufficient information from the screens to trade.

 

The future for Buxl options

How do the market participants see trading in Buxl options developing? GFI’s Pearson said that trades in the first month or so showed that “outright options are tradable in sizes of 500 contracts and higher”. However, the low yield, low volatility environment has generally “not been conducive to high options volumes, across the yield curve.” Instead, he expected relative value plays as well as twists and bends of the curve to remain in “greater focus”.

 

Similarly, Tuch acknowledged the reality of the German curve. Recent bear-steepening would be welcomed by many in the market but the ECB and long term investors would remain some of the largest holders of the bonds.

 

Tuch also noted the tension in the past between exchange-traded bond futures such as the Buxl, and the investment banks’ desire to put clients towards swaps. Still, the lack of movement in central bank interest rates, and hence the very front of the euro curve, had the effect of pushing active investors further out the curve, going well beyond 2y or 5y - even if monetary policy was the driver for the flow. That would continue to benefit long end products such as the Buxl futures, and Buxl options, even as new products (€STR futures? SURE futures?) make their mark.

 

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