market, as options are becoming a more acceptable risk management tool as well as a component of innovative strategies that leverage the growth and liquidity evolving in the market. At the same time, a number of regulatory fiats are acting as catalysts for further growth by resolving market deficiencies that have diminished institutional demand for options.
Yet it seems that whenever a trader, financial institution, government agency or entire marketplace implodes (think sub-prime CDOs), derivatives instruments are there to act as a scapegoat for any and all catastrophes. But perceptions regarding the use of equity options across the financial industry are changing, and not just at sell-side trading desks and market making firms that stand to benefit the most from a growing options market. Perceptions are also changing within the investment community, laying the foundation for a drastically different marketplace where the buy side will seek to wield even greater influence over its own destiny.
The highly dispersed and illiquid nature of the options market still favors the high-touch trading services that rely more on picking up the phone than booting up a trading station, but option’s trading is not immune from the universal pull of electronic trading. Sensing opportunity, tools and systems for sophisticated, high-volume trading institutions are being designed, tested and rolled out to trading desks by sell-side banks and technology vendors alike. The snowball effect is just beginning, but by 2010, two-thirds of all buy-side options trading will be conducted electronically.
As more market participants enter the options market, liquidity is growing. The appearance of a new user that seeks to use options as an asset class is contributing to exponential volume growth through the trading of complex multi-legged quantitative strategies. Add to this the growing acceptance of options trading strategies for risk management and alpha generating strategies by the most prudent of institutional asset managers and you have a market that is becoming more vibrant with every passing day. Restrictions are becoming more relaxed, yet at a measured pace and with the full buy-in of oversight boards, investment committees and those with fiduciary responsibilities.
The TABB Group study on Equity Options Trading 2008: Rising Out of Obscurity
This study is based on conversations with 49 traders at a broad variety of hedge funds, asset management firms and proprietary options trading institutions. The data is supplemented by informal conversations with numerous market participants including pension plan sponsors, options market making firms, exchanges and other liquidity pools, as well as the institutional options trading desks of major broker-dealers. Our conversations covered usage, mandates, sourcing liquidity, regulations, brokers and technology, all associated with trading options.