Options traders at institutional investment firms have continued to push order flow through low-touch channels in 2011, according to consulting firm TABB Group.
In its annual buy-side trading study, ”US Options Trading 2011: Finding the other Side of the Trade', DMA and options algos are shown to account for 66% of total buy-side options order flow, up from 64% last year. Trading is expected to reach 4.2 billion options contracts in the US in 2011, from 3.9 billion in 2010, marking the ninth consecutive year of volume increases. The equities market, by contrast, has seen relatively low trading volumes; the report hypothesises that the falling appetite for risk is increasing demand for hedging, which the options market is providing, in part.
“As institutional investors expand their use of options, they're finding it increasingly challenging to find the other side of the trade,” said Andy Nybo, TABB principal, head of derivatives and the study's author. “Options traders looking to trade in size are still dependent on sending instant messages and picking up the phone to get access to capital – but they're also exploring the capabilities of low-touch trading channels, especially in more liquid names.”
At the same time, he asserts, a growing diversity of strategies is driving implementation of order and execution management systems, including FIX protocols, DMA and algo trading support. Low commission rates and a desire to automate less challenging trades are further driving increased use of DMA for options trading, while algos are used to minimise market impact and seek liquidity, says Nybo. He notes that algos are particularly useful in options trading around the time of expiration, as arbitrage opportunities arise and seamless workflow becomes more important.
“Full-service options brokers that provide capital, trading support and guidance through the increasingly complex market structure will see that effort translated into higher broker commissions,” said Nybo.
The study was based on in-depth interviews with 51 options traders at US hedge funds, asset management and proprietary trading firms with an aggregate US$2.7 trillion in assets under management, trading an estimated 700,000 contracts a day.