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IDEM, the Italian Derivatives Market of Borsa Italiana has long been available for trading through TT software. IDEM’s offerings include futures and options on the FTSE MIB Index, which tracks the performance of Italy’s 40 most-traded and liquid companies. In an effort to meet increased investor demand, the exchange recently extended the trading hours for both FTSE MIB futures and FTSE MIB mini-futures by opening at 7:45am and closing at 10pm CET, which coincides with the close of the U.S. markets. Massimo Giorgini, Head of Equity and Derivatives Markets Business Development at Borsa Italiana – London Stock Exchange Group, talked with us about this and other recent developments at IDEM.

– Brian Mehta, CMO

For our readers who aren’t familiar with the IDEM market of Borsa Italiana, please give us a brief overview of the exchange and the trading opportunities you offer.

Massimo: IDEM is a leading market offering global access to Italian equity derivatives. The market offers investors the ability to trade the full suite of FTSE MIB index futures and options as well as the full range of Italian single stock options and single stock futures. IDEM has an established leadership position in its core offering. This is thanks to an extensive international client network, more than 20 market making firms providing strong liquidity, a unique and well-established partnership with the Italian retail brokerage community, a well-integrated trading and clearing services supported by resilient technology, a competitive business proposition for a diversified set of participants, and significant synergies between derivatives and other parts of the Borsa Italiana’s secondary trading ecosystem (Italian cash equities, ETFs and securitized derivatives).

IDEM has been available for trading through TT for a number of years. What have the volume trends been like over this period, and how do you see these trends evolving over time?

Massimo: Although volumes across a number of regional equity derivatives markets have been relatively subdued in recent years, FTSE MIB futures and FTSE MIB mini-futures have been amongst the fastest-growing equity index derivatives in Europe since TT connected to the IDEM market in 2013. Since then, we have on-boarded several new sell-side clients, including global leading market making firms and brokers. In that area, the IDEM market has been one of the most successful in Europe and has been less impacted by client consolidation and membership withdrawals in the last couple of years. In 2019, new all-time records were set on FTSE MIB futures, both in terms of daily contracts traded as well as open interest, which is a testament to the growing interest from final investors. Looking forward, 2020 looks like a very promising year for the IDEM market with FTSE MIB futures volume up 20% and FTSE MIB options volume up 16% in January, reflecting increased local market volatility and interest toward Italy.

IDEM recently extended the trading hours for FTSE MIB futures and FTSE MIB mini-futures. What drove this change, and what are you expecting to see as a result?

Massimo: The Italian derivatives market has a double vocation in terms of institutional and retail flows. Since the early 2000s, IDEM has been acknowledged as one of the very few in Europe enjoying significant activity contribution from retail investors. For this reason, Borsa Italiana has offered an After Hours session on Italian cash equities from 6:00pm to 8:30pm CET since 2000, as well as on FTSE MIB futures and mini-futures since 2017. Supported by growing client demand, particularly from the international online brokerage community and by U.S. investors, the IDEM market further extended trading hours on 17 February this year, opening continuous trading at 8:00am CET and closing at 10:00pm CET. This change in market structure has been strongly supported not only by the historically well-developed and technologically advanced retail industry, but also by institutional clients active in the U.S. and willing to match local trading hours, by getting exposure to Italy with the aim to generate alpha. Over 70,000 contracts have been traded on extended hours on the first two weeks after launch, representing 7% of daily volumes on FTSE MIB futures and 13% of volumes on FTSE MIB mini-futures. We believe this initiative represents an important development for the IDEM market and its international growth path.

What other things are you working on at IDEM?

Massimo: We are always focusing our business development efforts to stimulate new sources of liquidity to strengthen the price-discovery process to the benefit of final investors. From a functional standpoint, we have invested in developing advanced pre-trade validation controls, and we have released a new service for non-executing brokers. From a liquidity provision standpoint, we have eased market access by significantly reducing the logical connectivity costs for market making firms. Last but not least, we have introduced a “Nominated Client Scheme” allowing market participants to onboard quantitative trading clients with the ability to rebate execution fee discounts and increase trading capacity to allow them to unleash their full liquidity provision potential on FTSE MIB futures and options; the program has been successfully released with end clients already benefiting from it. On top of the successful extension of trading hours for FTSE MIB futures and mini-futures, in 2020, we expect to roll out further market structure enhancements with the aim of improving on-screen market liquidity and offering new block trading mechanisms and opportunities. We had the opportunity to discuss those initiatives during our roadshows in Europe and the U.S. with end investors, banks and liquidity providers, receiving positive feedback.

What are you seeing in Europe’s underlying cash equity market, and what effect might that have on derivatives?

Massimo: European markets have seen volume return to primary venues for a number of reasons, with Borsa Italiana experiencing peaks of more than 80% Lit trading value traded on the primary market. Some venues have experienced a growing polarization of volumes across closing auctions with peaks of 40% of overall value traded. However, Italian equity markets still enjoy most of the volume in “continuous trading,” as only 20% goes to the closing auction. The remarkable retail trading contribution has always counter-stimulated efficient liquidity provision by market making firms, providing Borsa Italiana to be the cash equity market featured by the highest share turnover velocity in Europe, with a positive effect on derivatives price formation and interest from other market participants and final investors.For additional information about the IDEM market, e-mail IDEM at IDEMMarket@lseg.com or visit www.borsaitaliana.it/derivatives.