US buy-side traders expect their use of options to grow in 2009 as trading conditions return to normal, according to a new study from research and consulting firm TABB Group.
Of the 54 traders at asset management firms, hedge funds market makers and prop trading firms TABB interviewed for the study, ‘US Options Trading in 2009: Resilience in the Face of Crisis’, 63% expected their options volumes to increase in 2009. A further 9% thought volumes would remain flat and 19% said volumes would decline. The remaining 9% provided no answer.
According to Andy Nybo, senior analyst at TABB and author of the report, many options strategies were either not possible or economically viable during the highly volatile trading conditions of Q3-Q4 last year. But traders will be ready to resume and increase options use as trading returns to normal.
“Options strategies allow buy-side traders to hedge and increase their returns through prudent strategies,” he told theTRADEnews.com.
Nybo cited the example of an asset manager that is planning to expand use of options across a fund, having only begun using them for a small part of its business a year ago. “The portfolio managers were very pleased with the programme and the trader was seeing 300% to 400% growth in his options strategy because of the success seen on a trial basis,” said Nybo.
The buy-side’s use of advanced techniques to trade options is also expected to grow. TABB expects use of FIX-based trading solutions to increase to 15% of order flow by 2010 from 2% in 2008. “Ninety percent of buy-side order flow is still executed by traders calling their brokers,” said Nybo. “But as they embrace options and use more options in their trading activities, they need to institutionalise those efforts. They are going to want to be able to support options trading through their order management system, which means they will want to have FIX connectivity.”
Use of options algorithms is also increasing. The study found that 23% of hedge funds and 9% of long-only asset managers are currently using execution algorithms for options and a further 32% of hedge funds and 41% are very interested in doing so, although they do not yet.
Despite the buy-side’s growing enthusiasm for options, TABB expects overall options trading volumes in 2009 to decline by 17% in 2009 and show only a marginal increase in 2010. This is bad news for brokers: TABB forecasts options commission revenues will fall by a compound annual rate of 10% by 2010. According to the Options Clearing Corporation, the year-to-date average daily contract volume in the US options market was 13.2 million as of 23 February. The year-to-date average daily contract volume at the end of February 2008 was 14.7 million.