European investment institutions will increase their use of equity derivatives products in 2010 following solid growth this year, according to new research by Greenwich Associates.
The research consultancy’s ‘2009 European Equity Derivatives Investors Study’ noted that the number of European investment institutions using equity options products increased to 78% in 2009 from 66% in 2008, based on the amount of commission paid for these trades. The increase was attributed to a growth in hedging activity over the last 12 months.
From 2008 to 2009, the European equity options commission pool expanded by around 16%, compared to the US where commission volumes dropped between 20-25% from mid-year 2008 to mid-year 2009, despite a marked decrease in institutions’ assets under management after the financial crisis across both continents.
According to Greenwich, the difference between US and Europe volumes could in part result from a contraction of the hedge fund industry in the US.
“Hedge funds play a much smaller role in the European equity derivatives market than they do in the United States, so deleveraging had less of an impact, and the increased use of these products by long-only institutions pushed commissions and overall market activity higher,” said Greenwich Associates consultant John Colon.
The research also found that over 90% of European institutions are actively monitoring the creditworthiness of sell-side firms, after the demise of US investment bank Lehman Brothers. Now, over one-third on institutions rank the creditworthiness of potential counterparties as one of the most important criteria they consider when selecting a broker for trading flow equity derivative products.
In the coming year, the study predicts that around 70% of European investment institutions will increase their use of flow equity derivatives products, with 11% expecting significant growth.
“These results suggest that the equity derivatives business in Europe should grow at (at least) a slightly accelerated pace in the next 12 months,” added Greenwich Associates consultant Jay Bennett.