US Options Trading 2014/2015: The Buy-side s Insatiable Thirst for Liquidity. Andy Nybo Head of Derivatives Research

Transcription

1 US Options Trading 2014/2015: The Buy-side s Insatiable Thirst for Liquidity Andy Nybo Head of Derivatives Research CBOE RMC March 4-6, 2015

2 Focus Introduction Challenges and opportunities Broker Selection Key takeaways 2

3 Traders are challenged finding liquidity even as volumes declined; lower market quality is increasingly impacting their ability to trade What has changed the most in options trading over the past year? Less liquidity 42% Dealers not comitting capital 33% Wider spreads 17% More weeklies 17% Fading markets Lack of prop impacting liquidity Liquidity fragmentation More reliant on tech 8% 8% 13% 17% Liquidity challenges are hampering institutional trading of options Better algos 8% Centralized execution capabilities 8% 3

4 Spreads continue to increase as shifts in market structure diminish incentives for market makers to quote $0.45 $0.40 Jan-13 to Dec-14: 112% increase $0.35 $0.30 $0.25 $0.20 $0.15 $0.10 $0.05 $0.00 Source: Hanweck Associates, TABB Group 4

5 Liquidity has become concentrated in the top 100 names with short expirations accounting for a growing share of total activity % 21.1% 10.1% 20.7% 8.1% % 19.1% 9.4% 20.2% 8.2% Top 10 names 11 to to to and above 5

6 Dealers are continuing to ration capital, especially to clients with more aggressive trading strategies Is the availability of capital higher or lower than one year ago? Asset managers 36% 21% 43% edge funds 11% 22% 67% Higher Same Lower 6

7 Quality of execution is becoming a higher priority for asset managers as strategies become more sophisticated How would you allocate $1 of commission spend? Asset managers % 41% 4% 12% 2% 2% % 52% 7% 4% 5% 3% Execution Capital Research Relationship Technology Back office 7 34

8 Hedge fund commission spend is increasingly being directed towards maximizing broker relationships How would you allocate $1 of commission spend? Hedge funds % 10% 16% 37% 1% 2% % 21% 7% 7% 5% 4% Execution Capital Research Relationship Technology Back office 8 34

9 Anticipation of rising AuM and renewed volatility are expected to drive increased volumes; recent volatility reinforces expectations How do you expect your trading volume to change in the next 12 months? Increase 56% 58% Depends on volatility 11% 42% Depends on AuM 27% 39% Flat 17% 19% Asset managers Hedge funds 9

10 Preferred product choice depends on strategies; targeted expirations and strikes remain in focus What products offer the greatest potential for your activities? (Rank 1 to 5, 5 Highest) Asset managers Hedge funds 10

11 Options with weekly expirations are accounting for a growing share of trading volume Millions of contracts % 25% 20% 15% 10% 5% 0% Weeklys Volume (Left Axis) Weeklys as a % of total volume (Right Axis) 11

12 The popularity of weekly SPX options continues to expand, especially in periods of elevated volatility Average Daily Volume (ADV) Percent of all SPX, on days weeklys exist* 400, , , , , , ,000 45% 40% 35% 30% 25% 20% 15% 10% 50, % 0% SPX Weekly ADV Weekly % of All SPX * Starting 5/31/12. SPX Weeklys exist every day. Source: CBOE 12

13 Broker Selection Old Slides 13

14 Execution quality & capital provision drive broker selection; relationships & staff are also important What are the most important factors driving high touch broker selection? Pricing 64% Capital Quality of staff 39% 36% Trader relationship Research Breadth of Services Market Color 24% 21% 21% 15% Quality of shows Commisison spend Technology Prime broker relationship 9% 9% 9% 6% 14

15 Low touch trading tools are becoming increasingly important for traditional asset managers Asset Managers 97% Phone 76% 69% Algo 9% 15% 3% DMA 14% 17%

16 while hedge funds remain focused on using the optimal order channel to achieve best execution requirements Hedge Funds 39% Phone 37% 38% 23% Algo 33% 30% 38% DMA 30% 32%

17 Asset managers want research and direction from their coverage; hedge funds want better execution Where do your brokers need to do a better job? Trade ideas Better pricing Consistency International capabilities Capital provision Commission levels Staff knowledge Back office support Better communication 0% 0% 0% 0% 0% 0% 13% 11% 11% 13% 11% 11% 11% 13% 13% 13% 38% 44% 17

18 Electronic functionality should focus on getting trades done; technology and work flow integration a plus How important are the following factors when you select your low touch brokers? (Rank 1 to 5, 5 Highest)

19 Front ends need to support more sophisticated strategies; ease of use & work flow support are also important What areas need improvement on your trading platform? Complex order capabilities 36% Back office functionality Layout 18% 18% Range of asset classes Ticker 9% 9% International 9% Data 9% 19 28

20 Algos users focus on more efficient work flows; aggressive users want to leverage the ability to support complexity Why do you use algos to support your options trading activities? Efficiency 69% Source liquidity Imbedded in strategy Manage complexity 31% 31% 44% Speed Hide intentions 25% 25% Better pricing 19% 20 20

21 Key takeaways The benign volatility environment forced buy side traders to the sidelines in 2014 Traders are refining strategies as lower volatility reduces opportunity Volatility strategies have been disproportionately impacted Lack of liquidity is challenging buy side traders Brokers are becoming more judicious when allocating capital Market quality continues to deteriorate Low touch channels are seeing rising adoption Broker capital rationing forcing a shift in behavior Complexity of strategies is driving technology adoption and needs Full service brokers remain important but rising costs are forcing brokers to rationalize offerings Balance sheet constraints forcing dealers to retreat from providing liquidity on demand Tiering of clients continues; sector strategies and aggressive accounts seeing greatest impact 21 39

22 US Options Trading 2014/15: The Buy-side s Insatiable Thirst for Liquidity Andy Nybo Head of Derivatives Research CBOE RMC March 4-6, 2015