TABB Says Options Traders Are Embracing Technology to Support Rising Levels of Trading and Complexity of Strategies

NEW YORK & LONDON--(BUSINESS WIRE)--Options traders are driving more order flow to low-touch channels in 2011 with direct market access (DMA) and options algorithms accounting for 66% of total buy-side order flow, up from 64% in 2010. According to TABB Group in its annual buy-side trading study, “US Options Trading 2011: Finding the Other Side of the Trade,” traders are turning to technology to support their rising level of activity in listed options.

“They’re chasing after $3 billion in annual buy-side commission revenues by providing a targeted range of services to some rather demanding clients”

The buy side remains enamored with options, which promises to stimulate trading across the US options market. Trading is on pace to reach a record 4.2 billion contracts in 2011, marking the ninth straight year of volume increases. This growth comes despite anemic trading in the underlying equity markets, where investor confidence and a desire for lowering risk exposures have reduced trading volumes.

Options trading firms are finding it critical to invest in technology to support their rising level of options trading. “As institutional investors expand their use of options, they’re finding it increasingly challenging to find the other side of the trade,” says Andy Nybo, a TABB principal, head of derivatives and the study’s author. “Option 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.”

The role of options in trading strategies is evolving, he adds, due to the availability of new products such as weekly options, expansion of dollar strikes and a greater focus on volatility attracting investors’ attention. “Volatility has moved into the daily lexicon of most institutional options traders and they are craving systems that provide easy-to-use functionality to support their analytical requirements,” says Nybo.

A number of innovations are increasing the appetite for more complex trading strategies, including spread-driven order books, intuitive-user interfaces and smart-routing logic. “The growing diversity of strategies is ushering in the implementation of order- and execution-management systems, including FIX protocols, DMA and algorithmic-trading support for more complex trading activities,” Nybo says.

The options brokerage community is meeting the buy-side traders’ rising interest and complexity of options strategies by investing in staff and technology. “They’re chasing after $3 billion in annual buy-side commission revenues by providing a targeted range of services to some rather demanding clients,” Nybo explains. “For some clients, it may be a combination of low commissions and direct access to exchanges. However, 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.”

The 39-page study with 36 exhibits is based on in-depth interviews with 51 options traders at US hedge funds, asset managers and proprietary trading firms with an aggregate $2.7 trillion in assets under management (AuM), trading an estimated 700,000 contracts per day. Additional input for analysis was generated through discussions with multi-national exchanges, institutional brokerage options-trading desks, electronic-execution desks and independent options-trading system vendors. Discussions covered the views of options traders across a broad range of topics: order flow allocation across low- and high-touch channels; commission rates and trends; factors around broker selection; technology trends; and what is necessary to win options order flow.

The study is available for download by TABB Group Derivatives Research Alliance 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 industry’s only strategic advisory and research firm focused solely on capital markets. 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, broker, exchange and custodian, helping senior business leaders gain a truer understanding of financial markets issues. For more information, visit www.tabbgroup.com. In January 2010, TABB Group launched TabbFORUM, the online community currently with more than 7,500 capital markets members, drawn from buy side and sell side firms, exchanges, regulatory agencies, academia, consultant, vendors and media, focusing on thought leadership issues covering current industry-wide topics.