European buy-side firms are expanding their equity derivatives activity this year as an antidote to low volumes and fragmentation in the cash markets and the need for new sources of alpha, according to a new study from research and consulting firm TABB Group.
The study, ‘European derivatives 2010: The buy-side perspective on equity options’, based on interviews with 51 buy-side head traders at asset managers and hedge funds in 10 of Europe’s most developed markets, found that expected growth in equity derivatives trading is being fuelled by changes in fund strategies, firms launching UCITS III funds and the difficulty of trading in Europe’s equity markets.
Undertakings for Collective Investments in Transferable Securities (UCITS) is a European directive governing the types of funds that are suitable for marketing to retail investors. UCITS III expanded the range of instruments that can be used in the funds to include certain types of derivatives.
“Whether because of difficulty trading the equity markets or the new strategic direction of funds, TABB Group believes the equity derivatives arena is ripe for progress,” said Miranda Mizen, principal at TABB and co-author of the report, said in a statement. “Trading tools need to keep up as the buy-side seeks to improve their electronic quote and trade capture capabilities and speed up straight-through processing, as this is a marketplace where they want to trade more if they can.”
According to the TABB study, over 50% of the buy-side firms interviewed have or plan to have UCITS III funds in 2010, while 69% plan to add swaps to the range of new products they will trade.
The study said that 71% of buy-side firms expect higher turnover in their main products in 2010, driven by changes in fund strategies and renewed asset growth. Mizen said that for some traders, derivatives are a tool to help with efficient housekeeping within a portfolio, but she added that for most, they are a necessary port of call to demonstrate performance, keep transaction costs to a minimum, maximise alpha and achieve portfolio investment goals efficiently.