US options traders tell TABB Group that they are actively exploring new ways to use options, expanding the types of options products they use, turning to more complex strategies such as multi-legged spread trades and increasingly executing these orders through direct market access (DMA) and algorithmic trading tools.
According to TABB in its annual buy-side trading study, “US Options Trading 2012: Standing Out in the Crowd,” written by Andy Nybo, a principal and head of derivatives, the buy side is investing in more powerful technology systems in both the front- and back-office to support the growing complexity of activities.
For this year’s 39-page, 34-exhibit study, TABB spoke with 54 US-based asset managers, hedge funds and proprietary trading firms, which as a group, manage an aggregate $2.7 trillion in AuM and trade an average of 517,000 options contracts per day. Interviews covered head traders’ views on a wide range of topics: order-flow allocation across high- and low-touch trading channels; commission rates; broker lists; technology priorities; and coverage differentiation in the high- and low- touch space.
Although TABB expects options volume to decline 10% this year greater adoption and increased focus on managing risk will set the foundation for future growth. Although anemic volumes in the underlying equity markets are negatively impacting options volumes, the effect has been somewhat muted as a result of broader adoption of options by buy-side firms, as well as replication strategies using short-term options as a proxy for the underlying.
“Options trading volumes may be down across the industry but the buy side continues to remain captivated with the potential of using options in their strategies,” said Nybo. “These firms are exploring more efficient ways of managing risk exposures and doing so, they’re expanding their product selection to include more VIX-related, ETF/index and listed FLEX options.”
Brokers remain locked in a fierce battle for order flow and provide a broad range of services in an attempt to attract buy-side orders. But the ability to commit capital is the key factor buy-side traders evaluate when determining the broker with which they want to trade. “Although liquidity of the option dictates how the trade is executed, often it’s the size and parameters of the trade that require capital commitment from a broker,” says Nybo.
The study also focuses on the continuing role of low-touch trading channels. According to Nybo, asset managers routed 33% of their total flow through low-touch channels in 2011, up from 15% in 2011. Hedge funds routed 63% of their volume through low touch channels in 2011, compared to 68% in 2010.
“Asset managers told us they’ve expanded their use of direct market access and algorithmic trading tools in 2011 due to the rising complexity of their strategies,” said Nybo. “In contrast, hedge funds relied more on high touch channels in 2011 in an attempt to reinforce relationships, given the lower volumes and commission dollars they are spending with brokers,” he added.
The study is available for download by TABB Group Research Alliance Derivatives clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to email@example.com.