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A key reason why I sold my $CBOE position earlier this year was my lack of faith in their European growth strategy.
Below I'll lay out why I'm so skeptical, and hopefully people smarter than me can chime in & tell me why i'm wrong.
Here we go:
$CBOE's European pitch is simple: while the US & Europe have similarly sized economies, Europe's financial markets are ~1/7th the size. $CBOE thinks it can close this gap & grow the market as a whole.pic.twitter.com/3EzddZJCNV
Why is Europe so much smaller? In short, fragmentation. Trading is split between 3 large exchange groups (LSE, Euronext, DB1) each with its own connectivity, exchange & clearinghouse to deal with - not to mention off-exchange trading where CBOE operates today.pic.twitter.com/mJSKtIGdvK
This is where CBOE wants to disrupt the status quo. With its purchase of EuroCCP, CBOE wants to consolidate fragmented trading on its US-style platform where liquidity will begin to build & compound.pic.twitter.com/k1UggL84vA
I'm skeptical that this strategy will work at all, let alone in the next 5-10 years. CBOE, a small US derivatives exchange with little success outside of VIX & SPX options, is going to come in and fundamentally change European market structure amidst a packed competitive field?
Europe is a different playing field entirely from the US. Nationalism plays a critical part in market share - France wants French stocks to trade in France, German in Germany, etc... Why would they let a US exchange dominate their market?
LSE, Euronext & DB1 may be a complacent bunch, but I don't think they're leaving a 7x volume opportunity on the table. They have boards & public shareholders just like CBOE does. Why haven't they done what CBOE plans to do already?
CBOE says market participants are frustrated with an opaque European structure. In the past, frustrated market participants have launched their own exchange to solve their own problems (ie ICE, Tradeweb, BrokerTec). Why aren't they doing this here?
I think CBOE's entrance may grow the market somewhat, but will only serve to fragment liquidity even further. Even if they succeed in holistically changing European market structure, I don't want to stick around to find out how long it takes or how much it costs.
What am I missing? Why will they succeed? Is their bet worth holding the stock to find out if it pays off? Thanks in advance for feedback/thesis pressure testing.
Below are more thoughts on my frustration with $CBOE & their recent earnings results for those interested:https://frontmonth.substack.com/p/cboe-q4-2020-earnings-review …
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