Italy’s IDEM leverages existing technology and a new service model to spur growth.

The Idem, Borsa Italiana’s equity derivatives market, is one of the fastest growing in Europe, based on contract trading volume. Its mission is to operate and grow an efficient, transparent and liquid market for listed derivatives by attracting an international member base and reaching out to educate private and institutional investors. IDEM’s trading systems and network, combined with its new service model, provides the right technology platform to enable it to achieve these ambitious plans.

The IDEM started in 1994 by offering futures contracts on the MIB 30 index. Having grown at the rate of 31 percent per year for the past three years, the IDEM is now the third largest equity derivatives market in Europe by notional turnover. Its listings include futures and options on the S&P/MIB index, the benchmark index for Italy, and on 42 single stocks.

Considering its performance during the first half of 2007, the exchange has a lot to boast about. Around 160,000 contracts per day valued at around EUR 6.5 billion changed hands across its screens. Moreover, it set a new trading volume record (551,655 contracts) on May 8 and a new open interest record (4.8 million contracts) on June 14. During the same period, trading volumes in the S&P/MIB options increased 27 percent, and single stock option trading increased 33 percent.

“We are continuing to see increasingly strong demand for exchange-traded equity derivatives from private institutional investors as well as from proprietary traders; this makes IDEM one of the fastest growing exchanges in Europe,” says Nicolas Bertrand, Director of Derivatives Markets at Borsa Italiana. “The appeal of the IDEM is definitely coming from its very active and liquid order books. Our 25 remote clients, who have direct access to IDEM screens from abroad now account for 44 percent of the IDEM’s trading volume. We are part of the global pool of liquidity. IDEM is not only the Italian market anymore!”

Europe is on the cusp of radical change as MiFID comes into effect in November 2007. The directive seeks to introduce more competition by breaking the monopolies of the exchanges and enabling best execution for European investors. Once the regulation comes into force, exchanges will compete based on their ability to attract liquidity.

To date, IDEM has been very successful in attracting order flow. The number of clients and market makers participating on the exchange has increased, spreads have tightened and more size is available on the bid and offer. “MiFID will increase competition, which is positive for the market and for our clients,” says Bertrand. “We are well positioned to take on the new challenges that will arise from this new directive.”

But the IDEM has worked hard to get where it is today. Over the past four years, it has worked closely with member firms to develop the market, including the launch of innovative types of orders and a state-of-the-art set of market maker obligations to support the liquidity of the market. This has resulted in a huge increase in the number of contracts traded on IDEM screens in 2007. The number of market makers has grown from 13 to 22 in the past three years. In addition, the market share of trades closed on the order book is one of the highest in Europe.

The IDEM also has been proactive in reaching out to educate investors. It realizes that, in order to run a fair and efficient market, it needs to make information about its products and services widely available. Only when investors understand the mechanics and the potential risks and rewards associated with equity derivatives will they have the confidence to trade on the IDEM. To this end, the exchange has held successful online trading expositions and seminars for retail investors. Similarly, on the institutional side it has been meeting with fund managers, who are becoming more active in derivatives trading. The constant and accurate flow of information to the market is also ensured by a new derivatives corporate action service available on the Borsa Italiana Web site (www. borsaitaliana.it/derivatives).

Technology has also been critical in allowing the IDEM to grow its business, take advantage of opportunities
and address challenges as they arise. “Technology is what links us to our clients,” says Bertrand. “We continuously invest to give our clients the best technology available to support their business on the IDEM.”

The idem was among the first exchanges to start using OMX’s integrated trading system for derivatives trading in 1994. The platform gives IDEM the ability to combine products and list strategies in real time. According to Bertrand, the fact that it is used in other leading derivatives markets and the ability to quickly develop and integrate new functionalities or products are significant benefits.

For more than a decade, OMX provided application support, development and major upgrade work, while a local Italian company handled infrastructure and operations. In April 2007, IDEM migrated to a new service model that is managed jointly by Borsa Italiana Group and OMX. The two companies work together to operate and support the system, network and part of the infrastructure.

Compared with the previous system, this model is more cost effective and enables the exchange to offer better service directly to members. The new hardware and connectivity solutions have decreased latency significantly. “As well, a new international customer service desk managed by BIt Systems, the technology arm of Borsa Italiana Group allows the exchange to stay closer to its clients,” Bertrand points out. Since OMX performs the same function for several other exchanges, the IDEM has achieved economies of scale and reduced risk.

The IDEM has been very active in growing its product base in the equity derivatives segment and indeed has a growth that is very well balanced between all products, but there are plans in the works to diversify the product range to include commodities. The IDEM aims to leverage its current trading platform to launch an electricity derivatives segment called IDEX. Major players such as Nordpool, already use the same OMX technology, so there will be few application changes required.

Perhaps the most significant development for IDEM is the recent merger between Borsa Italiana and the LSE, which was completed on October 1. At this stage, the two organizations are evaluating the potential opportunities for capturing synergies between IDEM and EDX, the LSE’s derivatives market that is 24 percent owned by OMX.

To compete in today’s environment, exchanges must be able to offer high quality products and services to attract liquidity. They need to keep an eye out for partnerships that will enable them to grow their business and use technological innovation to their best advantage. The IDEM, Europe’s derivatives rising star, is doing all three.