The market for U.S. equity options is increasing dramatically, according to TABB Group in a new industry benchmark study released last week entitled ‘Equity Options Trading 2008: Rising Out of Obscurity’.
With trading levels reaching record levels on a monthly basis, a more accommodating regulatory environment and an improved understanding of the benefits of options strategies, the size of the equity options markets soared to 2.8 billion contracts in 2007, a 41% jump from 2006.
“Long perceived as a financial flea market where the naive and uninitiated speculators attempted to get rich overnight, the options market is now a sophisticated bazaar where professionals ply their trade, using refined financial techniques that can no longer be viewed or portrayed as even remotely speculative,” writes Andy Nybo, senior analyst, TABB Group and co-author with senior analyst Kevin McPartland.
Although TABB Group estimates that just 30% of institutional investors are actively using options as part of their portfolio strategies today, it stresses that the market provides significant opportunities and expects the number of institutional accounts that will begin trading options to double in the years ahead.
TABB Group's study is based on conversations with 49 traders at hedge funds, asset management firms and proprietary options trading institutions, supplemented by discussions with participants at pension plan sponsors, options market-making firms, exchanges and other liquidity pools, and institutional options trading desks of major broker dealers.
According to the report, demand is emanating from 'every quadrant' of the institutional asset management community, even pension funds that have long shied away from using derivatives. “Hedge funds and proprietary trading desks are developing and implementing new strategies that arbitrage incremental opportunities faster than the human mind can possibly comprehend at the same time that institutional investors are increasingly using options as part of sophisticated portfolio management activities that seek to improve, maintain and enhance their alpha-generating opportunities,” explains Nybo.
TABB Group found that equity options trading is still predominantly a 'high-touch' trading area. However, the firm forecasts that by 2010 over 60% of all buy-side options trades will be executed through low-touch channels. In addition, TABB Group predicts that 35% of all order flow in equity options will be trading algorithmically by 2010, promoting greater electronic trading and efficiency in the trading process.