TABB Says the European Buy Side is Expanding Their Equity Derivatives Business

LONDON & NEW YORK--(BUSINESS WIRE)--Shaking off the frustrating association of blame for the global financial crisis, equity derivatives in Europe are now attracting buy-side traders who have been struggling with laggard volumes, fragmentation in the cash markets and the need for new avenues of alpha.

“European Derivatives 2010: The Buy-Side Perspective on Equity Options, Futures and Swaps.”

According to TABB Group, Europe’s buy side is gearing up for growth and diversity in equity derivatives. Driven by changes in fund strategies and renewed asset growth providing fresh impetus, TABB says 71% of buy-side firms expect higher turnover in their main products in 2010. For some traders, derivatives are a tool to help with efficient housekeeping within a portfolio, explain Miranda Mizen, principal at TABB and co-author with analyst Will Rhode of the new study, “European Derivatives 2010: The Buy-Side Perspective on Equity Options, Futures and Swaps.” But 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.

Based on in-depth interviews with 51 buy-side head traders from asset management firms and hedge funds located in 10 of the most developed markets in Europe, over 50% of the buy-side firms have or plan to have UCITS III funds in 2010, and says Mizen, “69% plan to add swaps to the range of new products they will trade.”

This first-ever European derivatives benchmark study looks at why, what and how the European buy side is trading equity derivatives and explores competition, product choices, broker relationships and expectations for the marketplace.

Although many buy-side traders use equity derivatives only to a limited extent, their interest in greater usage is due to a number of reasons. For many, says Mizen, there is a change of strategy by the fund manager or change of heart from the investor. For others, it is the opening of UCITS III funds and new assets. Fragmentation in the equities markets puts the ease of trading the top index futures in stark contrast to everything else, she explains, despite the lack of both liquidity and range of products, two sources of frustration. “This means either sticking to a limited range of products or running the gauntlet of illiquidity in the markets and risks associated with an OTC product.”

Counterparty risk concerns have driven activity toward listed products, say the authors, yet liquidity, traders claim, is their major challenge outside the top products. According to Rhode, they would trade more on exchanges if they could, favoring transparency, easy access and protection of clearing capabilities. “Yet the need for OTC products, custom baskets and oversized trades will temper the ability to trade on the exchange, but brings no lesser demand for transparency, faster trading and enhanced clearing solutions.”

“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,” says Mizen, adding, “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.”

The 50-page benchmark study with 45 exhibits analyses interview-based conversations with buy-side traders segmented into regions, 59% in the UK and 41% across Continental Europe and Scandinavia. Participants were also segmented by total funds under management (FUM), further segmented by size of asset managers and hedge funds as well as their use of listed and OTC trading. The study also details trading turnover; most-frequently traded derivatives; impact of regulatory changes; the role of ETFs; choosing an OTC counterparty; commission rates; execution methods, type of trading systems used and new trading capabilities planned in 2010; risk capital; factors in selecting brokers and average number of brokers; anonymity and dark pools; integration of cash and derivatives desks; facilitation of currency; and operational risk.

The study is available now for download by TABB Group Research Alliance Derivatives clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to info@tabbgroup.com.

About TABB Group

TABB Group is the financial markets industry’s only research and strategic advisory firm focused exclusively on capital markets, with offices in New York and London. Founded in 2003 and based on the proven interview-based research methodology of “first-person knowledge” developed by founder Larry Tabb, TABB Group analyzes and quantifies the investing value chain from the fiduciary, investment manager and broker, to exchange and custodian, helping senior business leaders gain a truer understanding of financial markets issues. In January 2010, TABB Group launched TabbFORUM, www.tabbforum.com, the by-invitation, online community where capital markets professionals share and contribute commentary on current industry-wide issues. For more information, visit www.tabbgroup.com.