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Tabb presentation 9.17.13 public
- 1. September 17, 2013 US Options Trading 2013: Looking for the Edge Andy Nybo Principal, Head of Derivatives TABB Group
- 2. Proprietary and Confidential Agenda Introduction and methodology Market conditions and strategies Liquidity challenges Technological necessity Broker services Key takeaways 2
- 3. Proprietary and Confidential 52 firms interviewed for the 2013 report 22 asset managers 26 hedge funds 4 prop trading firms Total AuM of $6.8 trillion AM - $6.7 trillion HF - $50.6 billion Prop - $2.5 billion Average daily trading volume for the sample totaled 644.6K contracts AM – 64.2K HF – 472.4K Prop – 108.1K 43% 49% 8% Asset Managers Hedge Funds Prop Methodology Participant Segmentation $6.8 Trillion AUM Population by Type 99.2% .7% .1% 3
- 4. Proprietary and Confidential 312 262 351 406 309 283 342 341 378 417 335 373 348 550 391 344 320 320 378 326 307 330 336 361 312 371386 361 Monthly Options Trading Volume Jan-10 to Jun-13 Source: OCC, TABB Group estimates 3,899 4,563 4,003 4,224 Annual Volume Note: All amounts in millions of contracts Options volume estimates: 2010 to 2013P 5.5% -12.5% US listed option volumes are flat year-to-date with volume projected to increase marginally in 2013 4
- 5. Proprietary and Confidential 0 10 20 30 40 50 60 70 80 90 2012 – 2013 Closing Low March 15, 2013 – 11.3 2012 – 2013 Closing High June 1, 2012 - 26.7 Jan-12 Dec-12 June-13 Benign volatility is causing the buy side to refine strategies and adjust expectations to a new normal Source: CBOE, TABB Group 5
- 6. Proprietary and Confidential Yes 68% No 32% Have you adapted your strategy due to lower volatility? How? 32% 24% 21% 18% 15% 9% 9% 9% 6% 6% 6% Manage exposure… Lower volumes Bigger Positions Writing tighter strikes Adjust expectations More precise focus Replication Spreads Less vol selling React faster Less overwriting Traders are becoming more precise in their options strategies as they look to capture declining levels of edge Source: TABB Group 6
- 7. Proprietary and Confidential 17% 33% 17% 17% 11% 22% 11% 48% 13% 22% 26% 17% 13% 9% 13% Less liquidity More liquidity More electronic trading Tiered liquidity Lower dealer capital Lower margins Weeklys New products Asset managers Hedge funds What has changed the most in options markets? The sell side is tiering liquidity, creating challenges for aggressive trading strategies requiring capital Source: TABB Group 7
- 8. Proprietary and Confidential Proportion of Volume Traded by Symbol 30% 35% 36% 36% 40% 39% 41% 21% 22% 21% 22% 22% 22% 21% 12% 10% 11% 11% 10% 11% 10% 25% 24% 23% 22% 20% 21% 20% 12% 9% 9% 9% 8% 7% 7% 2007 2008 2009 2010 2011 2012 2013:H2 Top 10 names 11 to 50 51 to 100 101 to 500 501 and above 72% of all volume is in top 100 names 8 Liquidity is becoming concentrated in the top 100 names with tighter markets and less available edge the result Source: OCC, TABB Group
- 9. Proprietary and Confidential 50% 11% 20132012 Asset managers 65% 58% 20132012 Do you use weeklys in your strategies? Hedge funds The buy side is increasingly using weeklys in strategies as liquidity builds and product availability expands Source: TABB Group 9
- 10. Proprietary and Confidential 1% 4% 3% 6% 3% 6% 7% 5% 9% 6% 11% 8% 12% 8% 10% 11% 12% 14% 15% 12% 16% 14% 16% 14% 18% 20% 15% 19% 22% 0% 5% 10% 15% 20% 0 10 20 30 40 50 60 70 80 90 100 Weeklys Volume (Left Axis) % of total volume (right axis) Volume in millions of contracts Liquidity will continue to build with volumes expected to reach 25% of total volume over time Source: OCC, TABB Group 10
- 11. Proprietary and Confidential Technological necessity
- 12. Proprietary and Confidential What projects? 29% 29% 14% 14% 14% 33% 11% 22% 11% 11% 11% 11% Back office Analytics Entire infrastructure New ETS Spread trading capability Broker neutral ETS OTC pricing Low latency platform Asset Managers Hedge Funds New technology projects are on hiatus; current priorities are targeted at efficiencies across the trading process Source: TABB Group 11 Yes 39% No 61% Have you implemented any new technology projects for options trading?
- 13. Proprietary and Confidential Electronic 36% Voice 64% Electronic 97% Voice 3% Electronic markets, market complexity and tiered liquidity are driving the use of automated trading tools Buy side accounts Market Making Firms What trading channels do you use for options (2012)? Source: TABB Group 12
- 14. Proprietary and Confidential 50% 25% 25% 29% 43% 29% Higher volumes Screen liquidity Commission savings Asset managers Hedge funds What would influence you to use more low touch order channels? Future gains in electronic trading will come from higher volumes and efforts to reduce trading costs Source: TABB Group 13
- 15. Proprietary and Confidential Broker Fighting for Market Share Broker services
- 16. Proprietary and Confidential How would you rank your top broker in the following service areas? 3.73.8 3.6 3.8 4.14.14.2 3.7 4.04.1 4.3 4.54.5 4.7 Research qualityMarket colorCommission rates Back office support Availability of capital Execution expertise Trust to work an order Second place broker Top broker Trust, execution and access to capital drive the broker selection process Source: TABB Group 15
- 17. Proprietary and Confidential 29% 56% 52% 21% 7% 7% 4% 7% 5% 5% 3% 4% Asset managers Hedge funds Execution Capital Research Relationship Technology Back office How would you allocate $1 of commission spend? The value of commission spend differs depending on strategy and type of order flow Source: TABB Group 16
- 18. Proprietary and Confidential Key Takeaways
- 19. Proprietary and Confidential Key takeaways The benign volatility environment is forcing buy side traders to chase edge Traders are refining strategies as lower volatility reduces opportunity Traders are exploring new products and asset types Tiered liquidity is challenging buy side traders Liquidity is concentrated in top 100 names causing tighter markets and reduced edge Brokers are becoming more judicious when allocating capital Low touch channels are important for more liquid options Use of DMA, complex orders and algos is critical in more liquid options The complexity of strategies is also driving technology adoption High touch, full service brokers are essential but lower commissions are forcing brokers to rationalize service offerings Competition from electronic execution and agency brokers is pressuring commission levels Full service brokers still dominate due to the need for capital and support for larger and more complex trades 18
- 20. Proprietary and Confidential 2013 Derivatives Research Calendar Fourth Quarter 2013 Research Calendar European Demand for US Listed Options Factors Influencing the Use of Options by US Mutual Funds US FCM Business 2013 The Value of Retail Options Order Flow 2013 Published Research US Options Trading 2013: Looking for the Edge US Options market Making 2013: Scale Scope and Survival Cross Listing: The Tension of Cooperation OTC Equity Derivatives: Harnessing the Liquidity US Futures Market: State of the Industry 2013 Monthly Options Liquidity Matrix 19
Editor's Notes
- In 2007 63% of volume was in top 100 names; 2012 it was 72%.Much of the trading is in weeklys. Faster markets and tighter spreads in these names require significant technology to support.