US Options Trading 2011: Finding the Other Side of the Trade Executive Summary Demand for US options continues to increase, with greater adoption across nearly all investor segments driving the industry’s steady growth. Trading is on pace to reach a record 4.2 billion contracts in 2011, marking the ninth year of consecutive annual volume increases. Increased demand is a big driver of growth, but so is the availability of new products that fit more closely with the targeted needs of traders.

The change that is impacting the options market is—for the most part—having a positive effect. Asset managers are increasingly using options within their trading strategies and are moving beyond call writing strategies and are using options for more sophisticated hedging and exposure management. Increased sophistication is driving changes in their work flows, with automating processes the key to future growth. Technology is becoming a bigger part of the trader’s day, with efficiency and simplicity representing core guiding principles to adoption.

There is a slow and measured movement towards the use of low- touch channels by firms that have traditionally relied on high-touch channels. These firms are beginning to turn to DMA for less-challenging trades and additionally are exploring the capabilities of DMA to execute more-complex trades, especially when electronic liquidity can support their trade. Algorithmic trading is also beginning to penetrate the buy-side trading desk, with adoption rates rising for both asset managers and hedge funds.

At the end of the day, however, brokers and their broad-range of services are integral to a buy-side trader’s success. There is significant demand for maintaining bilateral relationships, with high-touch services in the form of knowledgeable sales traders, specialized research and multi-asset support being critical.

US Options Trading 2011:
Finding the Other Side of the Trade
For this year’s buy-side options trading study, TABB Group spoke with 51 head traders at hedge funds, asset managers, and proprietary US options trading firms. The firms participating in the study represent an aggregate $2.7 trillion in assets under management (AuM) and traded an estimated 700,000 contracts per day. The data are supplemented by informal conversations with additional market participants including multi-national exchanges, institutional brokerage options trading desks, electronic execution desks, and independent options trading system vendors. Conversations covered the views of options traders around a broad range of topics including order flow allocation across low- and high-touch channels, commission rates and trends, factors around broker selection, technology trends and what it takes to win options order flow.