Renewed volatility and anticipated increases in assets under management bode well for institutional users of options in 2015, this after institutional options traders faced a challenging trading environment in 2014 as lower market volatility and lack of trading opportunities negatively impacted trading volumes from institutions.
In new annual benchmark research, TABB Group says buy-side traders, facing difficulties in getting access to broker capital and declines in displayed market quality, identified reduced market liquidity as a factor limiting their trading activity in 2014.
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TABB’s head of derivatives research Andy Nybo said, "The biggest problem facing options traders is the lack of sufficient liquidity when they need to execute larger trades, with 42% of the institutional firms we interviewed citing the lack of liquidity as the biggest change in the options markets in 2014."
The challenges associated with getting access to the other side of the trade, he adds, forced many accounts to the sidelines, especially smaller hedge funds unable to gain attention of brokers due to their limited potential for commission revenue.
Not all clients are equal in the eyes of options brokers, who are increasingly rationalizing the provision of capital to clients as global regulatory pressures to reduce balance sheet risk are trickling down to the options trading desk, explains Nybo.
He says 67% of the hedge funds interviewed indicated their options broker had reduced capital provision in 2014, with 43% of asset managers indicating a similar sentiment.
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By GlobalData"Hedge funds are becoming an endangered species in listed options markets as limited trading opportunities in the low volatility environment and the continued focus on improving broker balance sheet are forcing many to pull back from trading options," said Nybo.
However, despite reduced demand in 2014, the buy side remain bullish and plan to increase their use of options in 2015 and beyond, especially as volatility returns and assets under management continue to rise.
Brokers are reinforcing relationships with top institutional clients providing significant commission revenue to the firm.
However, in addition to competitive prices and liquidity on demand, buy-side traders tell TABB they want a comprehensive relationship with their broker encompassing capital and research, technology support and a seamless electronic trading experience as they continue increasing their use of direct market access (DMA) and algorithmic tools.
In 2014, asset managers routed 32% of their total contract volume through electronic trading tools, more than double the 15% proportion in 2013, said Nybo.
According to Nybo, "Hedge funds’ use of electronic trading has remained stable as they continued to focus commission spend through voice trades with brokers in an attempt to remain relevant with the broker coverage."
