What Drives Europe’s Markets? A Deep Dive with Euronext

Discover the engine behind Europe’s financial markets in this insightful conversation with Euronext’s Michael Barclay. From IPOs to clearing, learn how Euronext harmonizes diverse markets and drives trading across the continent!

Summary – IBKR Podcasts Ep. 218

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.

Andrew Wilkinson 

Welcome to today’s podcast. My name is Andrew Wilkinson. Today, we’re going to be talking about market structure. And to do that, I’m joined by Michael Barclay, who’s the Senior Product and Sales Manager at Euronext over in London. Welcome, Michael. How are you? 

Michael Barclay 

Andrew, good, thank you. Great to be here. 

Andrew Wilkinson 

Huge welcome to the program. Thanks for joining me. We’re going to drill down into the anatomy of European share trading. If I buy shares here in the United States, my broker directs the order to the exchange with the most competitive price, since shares tend to be multi-listed on many exchanges. But the exchange landscape is rather different over there in Europe, isn’t it, Michael? 

Michael Barclay 

It is. And we have—it’s a different market structure when we look at the U.S., which is one country with a market structure as a result, which is very different to having Europe, where you have multiple different countries, different regulators, different exchanges, etc. 

Andrew Wilkinson 

Tell me what Euronext was born out of. It’s a conglomeration of multiple exchanges over the years, isn’t it? 

Michael Barclay 

Yeah, exactly. And I think to assess the European landscape from a market structure and capital markets perspective, looking at, actually, our history is quite a good place to start because, exactly like you say, we are essentially an aggregation of local exchanges. We were formed in 2000 with the—let’s say—integration between the Brussels, the Parisian, and the Amsterdam stock exchanges. 

So, three core stock exchanges in Europe. And since then, built upon that. So we now run seven regulated markets in Europe, but that is as a result of acquisitions of the Lisbon exchange, the Norwegian exchange, Oslo Børs, the Italian exchange as well—most recently, Borsa Italiana. Now, these are key markets—and sorry, one more to add, the Lisbon market as well—but these are… The idea from our perspective is to really try and harmonize markets in Europe because, exactly like you said, it’s a totally different landscape in Europe versus the U.S. 

And the idea for us is to—so yes, we have multiple different regulated markets—but we have one harmonized trading platform, one CCP, to benefit investors. 

Andrew Wilkinson 

Can you explain the role of Euronext in shaping the financial markets? 

Michael Barclay 

Sure. Firstly, we have, obviously, these different regulated markets, and what comes with that is multiple different products. So, we have different products for these different countries, and this really spans across different asset classes—in equities, for example, in fixed income, commodities, and also contracts that are on top of these different asset classes as well. 

I think that’s the first point, how we’re shaping financial markets, especially in Europe, by having this diverse set of instruments that are traded via the Euronext umbrella. Add to that—and I guess to almost take a step back in terms of what is the platform for investors to use by trading on Euronext—and that is a trading platform called Optiq. 

Now, Optiq is our platform, which very much enables efficient trading. It’s transparent, it’s very fast to use, and this is a core element for our markets and something that enables capital markets in Europe in general. 

Andrew Wilkinson 

So now, there are two major ingredients that go into this—into an exchange’s operation: companies and investors. How do you support both of those sides? 

Michael Barclay 

Yeah, it’s a good question. And I think, if we look at the company aspect first, an exchange’s role in the life cycle of a company—or, let’s say, a company going from private to public—is an IPO listing. Now, why—just to break that down—why would a company want to go through an IPO process? And that is predominantly to raise capital. 

So, it could be for an expansion project. It could be for… A lot of technology companies, for example, look to increase their research and development to improve their products. By listing on an exchange, by making shares public to trade, that is a way of gaining equity and being able to reinvest. 

So, quite a core element and part of—let’s say—the chain is allowing companies to do this. What we also do is, because of—as I mentioned—this quite European space that we have, that also includes quite a wide base of investor profiles in different countries. Now, what that does is, again, as a company coming to list on an exchange such as Euronext, it allows your product, your shares, your company to have increased visibility and, as a result, benefit from that as well, which is quite a key point, I would say, in terms of how we’re helping companies. 

Take off that cap, put on the investor cap. So, from an investor perspective, I’ve already touched on it before, and that is that we have quite a diverse range of investment products. That is quite key in terms of how exchanges such as Euronext are supporting investors. We also have this trading platform, as mentioned, which is efficient and quite advanced to ensure that all trading is efficient and also shows real-time market data, which is quite an important point—so investors can be aware of current market prices on multiple different instruments. 

But we also have—I think this is quite a key point to mention—we have quite a significant, let’s say, risk management framework. Now, the difference is that there are exchanges backed by a central clearinghouse, and that is quite a key point in terms of—when we customize back to the 2008 crisis—a lot of trade and counterparty issues that resulted from that. There are a lot of mandates now worldwide for clearinghouses to guarantee trades across financial markets, and that is what we provide. That is what we provide in terms of a guarantee for trades, providing a robust risk management framework, which is, I think, a key point of how we’re helping investors as well. 

Andrew Wilkinson 

Walk us through the Euronext trading process ecosystem and how it functions from listing to post-trade. 

Michael Barclay 

Sure. So, I think the way to look at this is, we’ve got three individual bowls. Let’s say we have the primary markets bowl, we have the secondary markets bowl, and then we have the post-trade bowl. So, the primary markets bowl—we’ve discussed a little bit about that already in terms of IPOs and generating capital of companies. 

But this is the first stage of the life cycle for a company, in terms of the markets that we run. The second bowl, which is the secondary markets, it’s quite a key, let’s say, area in terms of trading. And this is where our platform comes in to facilitate trading between buyers and sellers. But this is where we have—we host all our markets in terms of cash, in terms of derivatives—and where traders, like I say, are able to buy and sell between each other and investors across the globe. 

So, this is quite a key point, of course. Once your company’s live and listed on an exchange by the primary markets, this is where the second part—this is where the bulk of the trading happens for companies. Last but not least, as mentioned, we had the post-trade elements. So, where Euronext also helps is in terms of the clearing but also the settlements of trades. And having this full, let’s say, life cycle of these three independent elements is… It’s quite an important thing to have underneath one house because it allows us to be quite efficient when rolling out new products, for example, and just having the full scope of the value chain within Euronext. 

Andrew Wilkinson 

About post-trade services, you’ve just completed the migration of Euronext Clearing. Give us an overview of that. That’s a fairly major development, isn’t it? 

Michael Barclay 

Yep, exactly. And exactly like you say, it’s a major development and, like I said before, it’s having everything under one value chain that is quite a value add. And to look back a couple of years, just to explain a little bit more, essentially before Euronext didn’t have its own clearinghouse until this acquisition of Borsa Italiana, the most recent acquisition, the Italian exchange. 

And Borsa Italiana had its own clearinghouse for its markets, which was formerly known as CC&G, since rebranded to Euronext Clearing. But indeed, exactly as you say, Andrew, it’s quite a significant milestone for us because it supports all our cash and derivative markets for all the products that we host and that we run on our marketplace. 

It improves efficiency for us across the board, and we look, for example, at a new trading initiative that we want to roll out to the market. Having it in the one house, under the one umbrella, allows for much more efficient rollout of products and also benefits for members in terms of margin efficiencies, which is also quite a key topic, let’s say, in 2024. 

Andrew Wilkinson 

Let’s talk a little bit about the Euronext order book. Can you explain and describe how buy and sell orders are matched in the Euronext order book? 

Michael Barclay 

Sure. So, I think the way to look at this is—and we’ll use an example—Euronext is essentially the marketplace. So, you have buyers and sellers at different prices trying to match. Now we have, and I’ll use an example of, let’s say, a L’Oréal call option. And on the exchange, on the central order book, we have buyers and sellers. We’re pricing a bid-offer spread of 9 and 11. 

Now, just to be clear, bid to buy, offer to sell, and the price to buy being the bid at 11. Now, if I was wanting to, let’s say, trade immediately, I would have to, from a buyer perspective, pay a price of 11, and that is essentially how, to start with, the central order book works in terms of a market order to execute your trade. 

But there are also different elements, different ways that people are able to trade on our central order book, with limit orders, where if I’m a buyer and I would like to buy, for example, at a price of 10, and the price is 9 to 11, I can put a price in with a limit of 10. Now, that’s a very, let’s say, simple show of what our order book does. 

We also have different elements in terms of matching. We have not only a price priority—as I mentioned, if you pay 11, when the offer is 11, you have priority there because you show the highest price—but there’s also a time priority. I think that’s quite a key thing to grasp as well because, to use this example again of a price being 9 to 11, if I want to pay 9 and there’s already a bid for 9 on the central order book, I’ll be put alongside the current bid at 9, but I won’t necessarily be filled at 9 if someone sells at 9 because there’s a priority in terms of who shows these bids first. So, these are the key elements of how our order book works. It’s a combination of price and timing across the board. 

Andrew Wilkinson 

Give us some sense of the key players in the market, Michael. 

Michael Barclay 

Sure. So, I would say, firstly, we have the investors, right? So, we have the everyday retail investor who would like to access Euronext markets in, for example, Paris or, for example, in Amsterdam. But we also have institutional investors. We have institutions both on the buy side and the sell side. 

So, by buy side, for example, asset managers, hedge funds, who actively trade our products. But on the sell side as well, where we have banks, we have brokers who access our platform to facilitate trading between counterparties who also contribute to our markets overall. 

A final and important, I would say, contributor and actor, let’s say, to our markets is not actually an investor as such—and it is the regulators. 

Now, as discussed towards the beginning, it’s a very different landscape, as one can imagine, versus the U.S., where we have the SEC, one regulator who manages the U.S. market. But it’s a very different landscape in Europe. We have, like I say, seven regulated markets. 

We have seven independent regulators that we must juggle, along with a European regulator as well. It is an important point and it’s a nuance because we’re an aggregation of local exchanges with different nuances in each country. It’s important that we collaborate very closely with regulators across different countries to ensure that everything is correct, that we’re transparent, and that we’re on the right side of regulation. 

But yeah, an important point to factor in as well. 

Andrew Wilkinson 

Michael Barclay from the Euronext Exchange, thank you for being my guest today. 

Michael Barclay 

Andrew, thank you very much. Great to be here. 

Andrew Wilkinson 

And to the audience, thanks for joining me on this episode. And remember to subscribe to the channel wherever you download your podcasts. 

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