Friday, September 27, 2013 6:51:06 AM

Liquidity concerns drive use of US options

US-listed options are becoming increasingly used by European investors due to difficult trading conditions in their home markets, according to research from consultancy TABB Group.

Options have become important for European investors in their hedging strategies, TABB said, but the European market is failing to adequately serve their needs.

There is a lack of opportunity in domestic markets and pressures on OTC-trading caused by incoming regulation, including the Markets in Financial Instruments Directive (MiFID), European market infrastructure regulation (EMIR) and Basel III.

“European investors say they’re facing significant challenges when hedging their portfolios of equity securities because the domestic European markets are not providing them with sufficient liquidity and, under the new MiFID, EMIR and Basel II regulatory landscape, the OTC markets have become less economically desirable,” said Andy Nybo, head of derivatives research at TABB and author of the report.

In comparison to Europe, the US-listed options market is significantly larger with far greater liquidity, the report said. European investors are also holding an increasing number of US equities, a total of US$1.9 trillion, a 21% annual increase since 2009.

Nybo added: “As the economic recovery in the US continues to gather steam, European investors will continue to allocate assets towards US exposure, which will include the use of options to manage risk and implement directional strategies.”

As well as being able to deploy sizeable trading strategies through the use of index options, European investors accessing the US market can also benefit from significant liquidity in single-stock and ETF options, which may not be available in their home market.