.jpg)
Despite the turbulence of 2008, the U.S. options market survived and continues to thrive even with all of the widespread bank failures, brokerage bankruptcies, shotgun mergers and hedge fund closures. According to TABB Group in a new annual research study published today, “U.S. Options Trading 2009: Resilience in the Face of Crisis,” the continued growth in options trading revenues has been a consistent bright spot for the brokerage industry recently, with trading volumes growing nearly 30% annually.
In 2008, U.S. options industry commissions totaled an estimated $2.6 billion as surging volume and increased participation by asset managers drove brokerage commissions to new records. However, reports Andy Nybo, senior analyst and study author, “industry commission revenues will experience a CAGR decline of 10% by 2010 due to competitive pressure and declining volumes.”
Although the outlook for industry volumes is downbeat for 2009 and 2010 – TABB Group expects trading volumes to decline by 17% in 2009 – there will be a marginal increase in 2010. There is obvious optimism ahead, Nybo says as “nearly 70% of the traders interviewed expect to increase their use of options as ‘normalcy’ returns to the marketplace and they deploy strategies suspended amidst 2008’s market volatility.”
TABB Group, focusing on the continued importance of options in the strategies of the buy-side and examining traders’ use of technological tools to enhance trading decisions, implement strategies and increase efficiency, interviewed 54 traders at asset managers, hedge funds, market makers and prop trading firms with aggregate assets under management (AUM) of $4.9 trillion, trading an average 15.7 million contracts monthly. Institutional investment managers experienced great success with option strategies in 2008, says Nybo, with little adjustment to strategies needed as a result of the volatile environment. “This is not to say that business went on as usual. Traders adapted to volatile market conditions by tweaking models and becoming more judicious with their overall level of risk exposure. Strategies were refined and trading activities curtailed during market extremes but the options market functioned surprisingly well throughout even the most turbulent times.”
No matter how much the options market has grown recently, Nybo says, “traders’ leading complaint continues to be liquidity,” which favors bulge-bracket dealers delivering a full suite of services and all but one of the top 10 dealers in TABB’s dealer rankings are bulge-bracket firms. Price improvement is a critical part of any trade and if by picking up a phone a trader can split the spread, they will choose the phone. But for “for tight markets with sufficient size, electronic trading will provide the biggest bang for the buck especially when commissions are factored into the equation.”
Low-touch execution, however, is clearly in the minds eye of traders. According to TABB, traders are using and will continue to use more DMA solutions. They are also adopting FIX-based trading solutions, currently accounting for 2% of buy-side order flow, rising to 15% of all flow by 2010, a 174% CAGR.
Addressing the rapid pace and introduction of innovative technological tools clearly overwhelming the buy-side, Nybo says, “Many traders remain blissfully unaware of many new tools provided by dealers and vendors alike, which may be intentional as they do not want to change long-standing ways of doing things, relying on brokers to handle their block trading needs. Others remain convinced that new tools such as algorithms will not work for their trading style and refuse to acknowledge potential applications for algorithms.”
“The good news,” concludes Nybo “is that the options market survived and continues to thrive even in the face of the dramatic forces reshaping the financial markets. It will continue to evolve as regulators try to formulate rescue plans designed to mitigate effects of the credit crisis. As these efforts evolve, so too will the options market.”
The 52-page report with 46 charts can be accessed by TABB Group Research Alliance Derivatives clients and pre-qualified media at at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, please visit http://www.tabbgroup.com or write to info@tabbgroup.com.
