European Trading of US Listed Options 2014: Shifting Demand in a Changing Market Landscape

European Trading of US Listed Options 2014: Shifting Demand in a Changing Market Landscape US listed options markets are well known for their deep liquidity and transparency, a direct by-product of a market structure that attracts a broad range of participants. Although the bulk of trading comes from domestic US market participants, international investors remain active, particularly those in Europe, which has always harbored a dedicated investor constituency that actively trades US listed options. This report represents the third in a series of TABB Group reports examining the use of US listed equity options by European investors. The first report, European Demand for US Listed Options, was published in 2011, with the second report European Interest in US Options: Factors Driving Renewed Demand published in 2013. This study updates the 2011 and 2013 findings and identifies recent trends influencing demand. Andy Nybo V12:020 March 2014 www.tabbgroup.com

European Trading of US Listed Options 2014: Shifting Demand in a Changing Market Landscape March 2014 Introduction European investors are active users of US listed options, with the strong market structure, deep liquidity and transparency holding powerful appeal. Although demand fluctuates depending on market conditions, our interviews clearly identified rising interest from a broad range of European investors including large institutional investment accounts as well as small hedge funds and private wealth managers. There is also nascent interest from the European retail investor and brokers are aggressively building out support for US options into their trading platforms. Factors influencing European demand for US options are varied and are closely related to overall levels of market volatility, investment strategy and exposure to US equities. Investors are also just beginning to embrace low touch trading channels, especially for smaller orders in more liquid options (see Exhibit 1). Structural Shifts in Demand Exhibit 1 What are the biggest changes in US options trading activity originating from Europe? The two biggest factors that have influenced trading activity in recent years Source: TABB Group are the outperformance of US equity markets and declining correlation among global equity markets. As market volatility has fallen, so has the perceived need to hedge equity portfolios, whether focused on US or global exposure. European investors use US listed options as a liquid and easy way to hedge equity exposures, but have reduced macro hedging activities as equity markets around the world have recovered from recession-era lows. As investment strategies have shifted, so has the use of US options. Investors may have reduced their use of US options for hedging, but they are still using them to manage exposures. TABB Group estimates that European-based investors accounted for an estimated 9% of daily US equity options trading volume in 2013, down marginally from 2011. The downgrade of the US government s creditworthiness in 2011 caused volume and volatility to surge as larger investors in Europe actively hedged their macro positions. Another factor impacting volume has been the continued shift in options trading operations to the US from Europe. As institutions increase their level of trading activity, they will continue to shift execution desks to US affiliates to streamline operations and take advantage of local US expertise. European investors are trading more exchange-traded funds and options on single stocks as they look to hedge exposures in US names and in specific market sectors. Listed volatility products are also enjoying rising demand as investors in Europe shift toward the deepening 2014 TABB Group, LLC. All Rights Reserved. May not be reproduced by any means without express permission. 3

European Trading of US Listed Options 2014: Shifting Demand in a Changing Market Landscape March 2014 liquidity pools of listed markets and away from over-the-counter products that European investors have traditionally favored. Hedge Funds Shifting Global Focus Hedge funds continue to represent the largest investor segment using US options but their participation has slowed as they have moved away from macro strategies focusing on US markets. The outperformance of US markets in 2013 shifted hedge funds attention to more attractive markets, with the prospects for European and emerging markets the focus for these strategies. The decline in hedge fund demand has been offset by rising demand from traditional investment funds and private wealth managers, both of which are active users of premium-generating strategies using US listed options. As the value of their US equity holdings increased, these two groups of investors have accordingly increased their level of activity in US listed options. In addition, these investors are moving beyond premium-based strategies and increasingly using options as part of directional strategies. A number of larger pension funds are also exploring the use of listed options as a replacement for some of their OTC activities, especially as open interest and Exhibit 2 Proportion of order flow by type of account: 2011 and 2014 Source: TABB Group trading volume in listed volatility products surged in 2013. Regulatory changes underpin this trend (see Exhibit 2). Growing Importance of ETF Options Index options have long been popular with European investors as a tool to manage risk and exposure, particularly for investors managing portfolios with concentrations in large capitalization international stocks. Although the correlation between a basket of stocks being hedged by an option and the index underlying that option may not be perfect, the ability to move quickly in and out of the option more than offsets the lack of perfect correlation. Options on indexes accounted for 9% of total trading volume in US equity option markets in 2013 but options on ETFs accounted for 36%. Demand for liquid hedging instruments has moved beyond the major indexes as rising liquidity in sector ETFs has attracted greater interest from investors. Last year, seven of the top 10 most actively traded options represented options on underlying ETFs (see Exhibits 3 and 4). 2014 TABB Group, LLC. All Rights Reserved. May not be reproduced by any means without express permission. 4

European Trading of US Listed Options 2014: Shifting Demand in a Changing Market Landscape March 2014 Exhibits 3 and 4 Volume by Type of Underlying Instrument in 2013/Ten Most Actively Traded Options in 2013 and 2012 Rank Symbol Volume 2013 2012 Index 9% Single Stock 55% 1 SPY 596,304,426 585,945,819 2 SPX 207,488,939 174,457,138 3 VIX 142,999,960 110,739,796 4 IWM 134,857,623 124,525,874 5 AAPL 133,565,372 191,865,563 ETF 36% 6 QQQ 94,302,472 113,719,614 7 FB 87,221,967 33,598,749 8 VXX 83,532,121 47,710,104 9 BAC 83,119,984 105,062,041 10 EEM 82,452,022 64,284,148 Source: OCC/TABB Group estimates The Appeal of Listed Volatility Products European investors are becoming more sophisticated in their use of options, moving beyond traditional overwriting strategies to enhance returns. Interestingly, the broadening of strategies is not confined to one particular investor segment. Our interviews with brokers and investors reflected growing interest across all types of investors, especially traditional investment funds and private wealth managers. Investors are using more complex strategies and aggressively using options in hedging activities to manage directional exposures around corporate events. Exhibit 5 Types of options strategies used by European investors: 2014 and 2011 The use of listed options as part of volatility strategies has also increased sharply as European investors move away from OTC instruments into listed volatility products which have grown exponentially over the past two years. Pension funds and insurance companies with complex financial portfolios have been the most aggressive in their use of these products, but interest is also rising within the private wealth industry for volatility products that can help hedge equity exposures (see Exhibit 5). Source: TABB Group The Attraction of US Options Market Structure Trading in European listed options remains fragmented across multiple exchanges, with vertical clearing facilities resulting in margin inefficiencies and fragmentation of capital. The result is a market structure that inhibits liquidity and raises costs for market participants. 2014 TABB Group, LLC. All Rights Reserved. May not be reproduced by any means without express permission. 5

European Trading of US Listed Options 2014: Shifting Demand in a Changing Market Landscape March 2014 Most trading that occurs on exchanges is traded upstairs and brought to exchanges for clearing, resulting in a market with little pre-trade transparency. As a result, the majority of European options trading occurs in bi-lateral OTC markets among brokers and institutional investors. Although OTC agreements provide considerable flexibility and ease of trading for investors, they are also the target of global regulatory initiatives designed to increase transparency and lower systemic risk by moving derivatives trading to exchanges and central clearing facilities. Even as regulators slowly push more trading to listed markets, traders are quick to gravitate to liquid and transparent instruments, a factor that makes US options products increasingly attractive, especially when traders are hedging an underlying position or seeking to efficiently manage exposures. Deep liquidity and ease of access make US markets attractive; the biggest challenge for European traders is their lack of understanding of US market structure. US markets have a broad range of participants that provides a diverse pool of liquidity. A significant constituency of retail and institutional investors trade options but the market is also supported by hundreds of market makers that actively provide two-sided markets across the 12 exchanges. And although trading is fragmented across those 12 exchanges, the horizontal clearing structure supported by the OCC facilitates liquidity and competition across the marketplace (see Exhibit 6). Exhibit 6 US Options Markets Benefit Through the Horizontal Clearing Structure Source: TABB Group A Note about Methodology TABB Group interviewed 31 US and European individuals representing 27 firms for this report, representing a diverse mix of broker-dealers, institutional investors and vendors active in US listed options markets. All interviews were conducted in February 2014 on an anonymous basis. In certain cases, interviews included multiple participants from one firm. The interviews were conducted in an open-ended manner and often included multiple 2014 TABB Group, LLC. All Rights Reserved. May not be reproduced by any means without express permission. 6

European Trading of US Listed Options 2014: Shifting Demand in a Changing Market Landscape March 2014 responses to a single question, hence totals may add to more than 100%. As defined in this report, European trading of listed options includes only trades executed by a firm domiciled in the UK or continental Europe (see Exhibits 7 and 8). Exhibits 7 and 8 Respondent Profile/Regional Segmentation 10% 6% 13% 39% US 58% 17% 17% 8% 32% Europe 26% 53% 11% 11% Broker-Dealers Institutional Investors Retail Brokers Vendors Exchanges Source: TABB Group Conclusion European investors represent a significant source of order flow for US listed options markets with broad diversity in the types of investors actively trading in US options markets. The strong market structure, deep liquidity and significant transparency provide European investors with a flexible tool to manage US equity exposure, to take directional views and to earn premium income through overwriting strategies. European investors are becoming more sophisticated in how they use US options with complex orders involving multi-legged strategies increasingly common. Volatility strategies are also rising in popularity, especially as liquidity in listed volatility products has seen exponential growth. Investors are also using US listed options in favor of OTC instruments, as regulatory pressures to increase transparency and reduce bi-lateral risk exposures push more trading on exchange. European investors can trade US options with relative ease, with most investors using high touch channels such as the telephone or instant messaging to trade with a broker. There is also rising demand for more direct access, with smaller accounts using low touch, electronic channels to send orders directly to the exchanges. A small but growing retail client base is emerging, with retail brokers beginning to build systems to support the emerging demand. US listed options markets are an important tool used by European institutional investors to manage their equity exposure, especially for accounts with high levels of US equity assets under management. As velocity of international capital flows continues to increase, US options will provide a powerful tool for European investors to manage exposure, especially given its deep liquidity and ease of access, factors that become critical in times of elevated volatility. 2014 TABB Group, LLC. All Rights Reserved. May not be reproduced by any means without express permission. 7

European Trading of US Listed Options 2014: Shifting Demand in a Changing Market Landscape March 2014 TABB Group About TABB Group is a financial markets research and strategic advisory firm focused exclusively on capital markets. Founded in 2003 and based on the methodology of first-person knowledge, TABB Group analyzes and quantifies the investing value chain, from the fiduciary, investment manager and broker, to the exchange and custodian. Our goal is to help senior business leaders gain a truer understanding of financial market issues and trends so they can grow their businesses. The press regularly cites TABB Group members, and members routinely speak at industry conferences and gatherings. For more information about TABB Group, visit www.tabbgroup.com. The Author Andy Nybo Andy Nybo has more than 25 years of experience in research and technology applications in the global capital markets, and is a Principal and Head of Derivatives at TABB Group. Currently focusing his research efforts on the OTC and listed equity derivatives markets, examining how technology is playing an increasingly integral role on both the buy-side and sell-side desktops, he has written the following recent TABB Group studies: US Retail Options Trading: It Doesn t Get Any Better Than This, US Options Trading 2013: Looking for the Edge, US Options Market Making 2013: Scale, Scope and Survival, US Options Trading 2012: Standing Out in the Crowd, Processing Complexity: Back Office Challenges of Listed Derivatives, Innovations in Accessing Asia: Listed Equity Derivatives & Delta One Products, and Accelerated Expirations: The Growing Relevance of Short Term Options. www.tabbgroup.com New York + 1.646.722.7800 Westborough, MA + 1.508.836.2031 London + 44 (0) 203 207 9027 2014 TABB Group, LLC. All Rights Reserved. May not be reproduced by any means without express permission. 8

European Trading of US Listed Equity Options 2014: Shifting Demand in a Changing Market Landscape Andy Nybo V12:020 March 2014 www.tabbgroup.com TABB Group Credit Default Swaps: Industry Projections March 2009 1

Executive Summary Growing sophistication of European investors; solid growth in directional, premium-generating and volatility strategies. Competitive market structure, deep liquidity and transparency continue to attract European customers. European demand for US listed options remains strong, with order flow from Europe accounting for an estimated 9% of total trading in 2013. Post-crisis shift in institutional demand as European financial markets begin to recover and global investment allocations are adjusted. Proprietary accounts and sell-side desks remain active users but are shifting activity to the US as volumes rise and US expertise becomes more important. Strong increase in value of US equity assets held in the UK, Luxembourg and Switzerland. Private wealth managers expand use of US listed options, driven by rising client AuM and electronic access. Rising interest from European retail clients to trade US options with transparency and ease of access driving demand. TABB Group European Trading of US Listed Equity Options 2014 March 2014 2

Study Methodology TABB Group interviewed 31 US and European market participants representing 27 different firms supporting US listed options trading activities. All interviews were conducted on an anonymous basis. In certain instances, the interviews included multiple participants from one firm. The interviews were conducted in February 2014 with a focus on changes in European attitudes toward US listed options markets since 2011. Responses from the interviews are represented graphically within the report. The interviews were conducted in an open-ended manner and often included multiple responses to a single question (hence, totals may add up to more than 100%). Response percentages are calculated as a percentage of total responses for each question. As defined in this report, European trading of US listed options includes trades executed by a firm domiciled in the UK or continental Europe. Trading activity by US-based subsidiaries of European firms were not included in the total. No attempt was made to identify the ultimate beneficiary of fund investors that may be located outside Europe. This report represents the third in a series of TABB Group reports examining the use of US listed equity options by European investors. The first report, European Demand for US Listed Options, was published in 2011, with the second report European Interest in US Options: Factors Driving Renewed Demand published in 2013. Both reports are available for download at www.optionseducation.org. TABB Group European Trading of US Listed Equity Options 2014 March 2014 3

The interview set included 31 participants from a cross section of US and European firms active in the US listed options industry The firms in the sample included broker-dealers, market makers, retail brokers, data providers, execution management system providers, US options exchanges, hedge funds and traditional asset managers. Respondents were geographically dispersed and included firms based in the US, UK and continental Europe. The majority of interviews were conducted with individuals in the UK and continental Europe, representing 61% of the total with individuals in the US accounting for the remaining 39%. 10% Respondent Profiles 6% Regional Segmentation 13% 39% US 58% 17% 17% 8% Europe 26% 53% 11% 11% 32% Broker-Dealers Institutional Investors Retail Brokers Vendors Exchanges Source: TABB Group Interviews TABB Group European Trading of US Listed Equity Options 2014 March 2014 4

Key Findings

European investors accounted for an estimated 9% of total US listed options trading volume in 2013 Hedge funds domiciled in Europe represent the largest source of demand for US listed options. Demand has declined since 2011 as the focus of strategies has shifted away from the US. Lower correlation has hit flows. Private wealth accounts are a growing source of order flow. High levels of US equity exposure have risen in value. Focus on overwriting and risk management has led to rising activity. Proprietary accounts and sell-side desks remain active users but are shifting activity to the US. Need to access local expertise and operate during US hours drives decision to establish US presence. Traditional asset managers represent a small but growing proportion of activity. Increasing adoption amid greater focus on reducing risk and improving returns. Deep liquidity is a powerful factor driving demand. Other investor segments including retail and corporations represent a small amount of activity. Retail brokers have identified and are targeting growing demand from active traders. Challenged to shift demand away from local instruments. Proportion of US Listed Options Order Flow Executed in Europe Hedge funds Private wealth management Proprietary accounts Investment managers Other Source: TABB Group estimates 5% 6% 4% 4% 18% 15% 14% 21% 2011 2014 58% 55% TABB Group European Trading of US Listed Equity Options 2014 March 2014 6

European investors actively embrace US options across multiple strategies; deep liquidity, transparency and electronic access support growing demand What are the biggest changes in US options trading activity originating from Europe? Growing demand ore electronic trading Volatility focus ETF demand Focus on Europe 17% 25% 29% 38% 54% Brokers report rising demand for US listed options. Electronic access growing in importance. Strong growth and future demand forecast for hedging with ETF and volatility products. Countering demand is the de-emphasis on US exposure from macro strategies as European equity markets recover. How has demand for US options products changed since 2011? Greater understanding 17% Refined strategies 17% Best execution focus Focus on pricing More listed products 17% 13% 13% Response percentages are calculated as a percentage of total responses for each question. Increased 93% Lower commissions Source: TABB Group Interviews 13% Decreased 7% TABB Group European Trading of US Listed Equity Options 2014 March 2014 7

European investors are becoming more sophisticated in how they use options; directional and volatility strategies are expanding across the user base European institutional investors are expanding the diversity of options strategies. Asset managers and pension funds using more options in directional and hedging strategies. Private wealth managers implementing more sophisticated strategies. There is rising interest from European retail investors to trade US options. Retail brokers improving electronic access to meet rising client interest. Transparency and ease of access driving demand Volatility strategies using US listed options and futures products are becoming more popular. Regulation forcing investors to use listed rather than OTC products. Hedging strategies continue to focus on ETF and sector index products. Sector hedging strategies rely on liquid products to ensure ability to exit a position. Declining correlation is raising investor focus on single stock options. Directional strategies focusing on corporate actions. Short term expirations a popular tool. What types of strategies are European investors employing with US equity options? Directional/ Hedging Volatility Premium/ Overwriting 6% Source: TABB Group Interviews 41% 71% 62% 62% 2014 2011 100% Correlations between indices and single names were fairly high and that is changing, with more focus on single stock options especially around earnings. -US Broker TABB Group European Trading of US Listed Equity Options 2014 March 2014 8

The use of ETF options has become more important in hedging strategies while declining correlation is shifting focus to single stock options In 2011, European investors were just beginning to see opportunities in ETF products. ETF growth potential remains bright. Sector-specific hedging strategies driving adoption. Volatility exposure is becoming a larger focus. Clients are leveraging technology to support multiasset trading strategies. Falling correlations will favor use of single stock options. What Types of Options Are Currently Being Traded? Single stock ETF Index Source: TABB Group Interviews 39% 2014 2011 65% 70% 55% 91% 90% Where Do You See the Greatest Growth Potential? 2011 2014 ETF Volatility products Weekly expirations Index 25% 38% 38% 50% Weekly expirations Volatility products Multi-asset trading 37% 50% 56% Single stock 13% ETF 31% Source: TABB Group Interviews Source: TABB Group Interviews TABB Group European Trading of US Listed Equity Options 2014 March 2014 9

Rising demand for listed volatility products has accelerated as regulators push for centrally-cleared products The use of US listed options as part of volatility strategies has grown considerably. Increasing liquidity in listed markets is attracting greater interest. OTC volatility products are important but investor preference is shifting toward listed products. The two most active volatility options represent $1.5 billion in daily notional value traded. High volume days exceed $5 billion notional traded. Accounts that like to trade volatility love the US options markets due to the deep liquidity in the volatility products. -European Broker Average Monthly Volume in millions of options contracts 1.9 2.2 2.8 1.9 2.2 2.8 5.7 0.5 5.2 10.3 2.1 13.2 4.0 8.2 9.2 18.9 7.0 11.9 23.4 7.0 16.5 Barclays ipath S&P 500 VIX ST Futures ETN (VXX) Open interest: 4.4 million contracts Average daily trading volume: 175,000 Average daily notional value traded: $265M CBOE Volatility Index (VIX) Open interest : 10.1 million contracts Average daily trading volume in 2014: 412,000 Average daily notional value traded: $1.2B Source: CBOE, OCC, TABB Group estimates VIX VXX TABB Group European Trading of US Listed Equity Options 2014 March 2014 10

European investors are still using the phone to trade larger orders; adoption of electronic trading channels for smaller orders is growing Large institutional investors generally execute by phone to access capital and get market color. Small transactions are transitioning to low touch. Financial Information exchange (FIX) connections are being adopted broadly to meet compliance burdens. Best execution documentation for high touch trades driving demand. Direct market access (DMA ) support for options is not a focus; regional diversity and number of accounts dilutes direct efforts. Cost to promote platforms is prohibitive. Incremental upside for front-end vendors is low due to lack of existing trading constituency. Brokers and data vendor efforts are more successful due to sales presence and client relationships. Smaller funds are embracing electronic tools to execute smaller orders. Workflow efficiencies and lower commissions are driving adoption. 2014 2010 US European clients are using low touch channels to trade. They are becoming more comfortable trading electronically in US markets. -US Broker What order channels do European investors use to access US options markets? 32% Europe 86% 90% 68% 14% 10% High touch Low touch Source: TABB Group estimates TABB Group European Trading of US Listed Equity Options 2014 March 2014 11

Lack of understanding of US market structure and trading protocols create the biggest barrier for European institutional investors Understanding of US options market structure has improved in recent years but the fragmented exchange landscape is confusing. Investors are using more complex strategies and testing low touch order channels. Complex exchange pricing schema inhibits low touch electronic trading for less sophisticated investors. Inexperienced users look to brokers to support operational complexities that differ from European markets. Lack of block crossing capabilities fosters use of broker capital. Inability to delta hedge as part of execution incurs leg risk for clients trading high touch. Dedicated technology to support options trading is not broadly available. Large firms with multi-asset capabilities will invest if magnitude of activity supports need. Smaller firms do not have technological resources to support efficient access. Market structure Different trading protocol Lack of crossing facility Market access One thing we can do significantly better is to educate European accounts on market structure and the amount of liquidity that is available in US markets. -US Broker What is the biggest challenge facing buy side accounts trading US options? 17% 25% 33% 58% Source: TABB Group Interviews TABB Group European Trading of US Listed Equity Options 2014 March 2014 12

Although regulatory initiatives do not specifically target US options instruments, many have an ancillary impact on demand Direct European regulation has very little negative impact on trading of US options by European investors. Adhering to global patchwork by creating compliance programs raises costs for all market participants. European regulations and reporting requirements are resulting in exponential rise in compliance costs. Regulations designed to increase transparency and reduce risk are shifting demand away from OTC products to listed instruments. US regulations intended to address fraud and improve reporting are shifting demand away from US assets. Initiative Region Intent Impact Impact on US listed options Basel III Global Improve capital adequacy of banks by reducing risk exposures Lowers risk capital to facilitate transactions in listed options and OTC derivatives Will drive greater demand for listed options Foreign Account Tax Compliance Act (FATCA) US Identify US financial assets held in foreign accounts to reduce tax evasion Brokerage firms required to request detailed identifying information from clients trading in US instruments Reduces demand from clients not wanting to report financial information to US regulators Markets in Financial Instruments Directive (MiFID) Europe Harmonize regulation across European Economic Area Increase oversight; allows cross border operation; increases transparency and mandates best execution requirements Minimal but raises overall compliance spend for brokers and investment firms European Market Infrastructure Regulation (EMIR) Europe Increase the safety of the OTC derivatives market in Europe Requires standardized OTC derivatives contracts be traded on exchanges, centrally cleared and reported Minimal but raises overall compliance spend for brokers and investment firms Camp Proposal US Change tax treatment of options transactions Premium and hedging options strategies become taxable events Significant negative impact on US options market liquidity Financial Transaction Tax Europe Raise revenues Raises the cost of trading, especially for high volume trading accounts Will drive trading interest into nonimpacted markets and instruments UK Bribery Act UK Eliminate inappropriate payments intended to solicit business Requires firms to institute internal procedures to demonstrate compliance with the Act Minimal but raises overall compliance spend for brokers and investment firms TABB Group European Trading of US Listed Equity Options 2014 March 2014 13

US Options Market Structure

US options markets volume has seen strong growth since 2000, with trading increasing 2.7% in 2013, the second highest annual level on record Annual US Options Trading Volume 2000 to 2013 2000 to 2013 CAGR: 14% Billions of contracts 2.0 1.5 1.2 0.7 0.8 0.8 0.9 2.9 3.9 3.6 3.6 4.6 4.0 4.1 US options volume increased 2.7% in 2013, with the 2000 to 2013 compound annual growth rate (CAGR) reaching 14%. Strong trading in index and ETF products. Political uncertainty in the second half of the year propelled use of index products. Hedging strategies surfaced in second half of year as investors protected gains. Volume in options with short term expirations contributed to the increase. Weeklies accounted for 19% of total in 2013, up from 13% in 2012. Share of 2013 volume by type of option Index 9% Single Stock 55% ETF 36% Source: OCC Source: OCC TABB Group European Trading of US Listed Equity Options 2014 March 2014 15

Liquidity in US options markets is highly concentrated in large capitalization names with the majority of trading occurring in short term expirations Liquidity in US option markets is concentrated, with 71% of trading occurring in the top 100 names. Index and ETF options dominate most active symbols. Most active single stock names include large capitalization companies and story stocks. Volume in short term expirations account for the majority of trading. Weekly expirations accounted for 24% of volume in January 2014 (July 2010 = 4%). Options with weekly expirations are available for 340 symbols. 150 100 50 0 Weekly Expiration Volume 4% 6% 3% 7% 9% 12% 8% 12% 12% 9% 9% 9% 8% 7% 8% 26% 12% 21% Concentration of Liquidity by Volume Tier 23% 23% 22% 20% 21% 21% 10% 11% 11% 22% 21% 22% 10% 11% 10% 22% 22% 21% 30% 35% 36% 36% 40% 39% 40% 2007 2008 2009 2010 2011 2012 2013 Top 10 names 11 to 50 51 to 100 101 to 500 501 and above 15% 12% 16% 18% 14% 22% 24% 30% 25% 20% 15% 10% 5% 0% Weeklys Volume (Left Axis) Source: OCC, Hanweck Associates, TABB Group estimates Weeklys as a % of total volume (Right Axis) TABB Group European Trading of US Listed Equity Options 2014 March 2014 16

Index and ETF options are increasingly favored tools for hedging and directional strategies Index and ETF options account for a growing share of total volume. 7 of top 10 most actively traded options are index or ETF products. Represented 81% of total top 10 volume. Favored product for investors seeking to hedge sector exposure. 70 60 50 40 30 20 Trading in Active ETF and Index Options Average monthly volumes In millions of contracts Top Ten Options Traded by Total Volume Rank Symbol Volume 2013 2012 1 SPY 596,304,426 585,945,819 2 SPX 207,488,939 174,457,138 3 VIX 142,999,960 110,739,796 4 IWM 134,857,623 124,525,874 5 AAPL 133,565,372 191,865,563 6 QQQ 94,302,472 113,719,614 7 FB 87,221,967 33,598,749 8 VXX 83,532,121 47,710,104 9 BAC 83,119,984 105,062,041 10 EEM 82,452,022 64,284,148 10 - Source: OCC SPY SPX VIX EEM VXX XLF FXI EWZ 2007 2008 2009 2010 2011 2012 2013 2014:FEB ishares State Street CBOE S&P CBOE VIX Barclays S&P Index Emerging State Street ishares ishares Latin S&P 500 ETF Index Volatility ETN Markets ETF Financial ETF China ETF America ETF TABB Group European Trading of US Listed Equity Options 2014 March 2014 17

Customer order flow accounts for more than half of all US listed options trading with market makers quoting two-sided markets across all options series Customer order flow accounts for 52% of all trading in US listed options markets. Active institutional participants include hedge funds and proprietary trading accounts. Asset managers are expanding their activity. Retail investors provide significant order flow in US options markets. Account for 24% of total daily trading volume. Most trading executed through electronic tools. Trading in US Options Markets by Type of Account 45% 47% 48% 48% 48% Why do you trade options? (US investors) Generate premium 42% 100% 30% 32% 30% 28% 28% Directional strategy 55% 42% 22% 20% 22% 24% 24% Volatility related 18% 65% 2010 2011 2012 2013 2014 Hedging 27% 64% Retail Institutional Market maker Source: TABB Group estimates, OCC Asset managers Hedge funds TABB Group European Trading of US Listed Equity Options 2014 March 2014 18

Market Structure Comparison

European market s limited listed liquidity and preferred trading procedures encourage use of European OTC instruments Trading preferences of European institutional investors favor trading in the dark. European block crossing mechanisms favor upstairs trading. Investors are comfortable trading in OTC markets. Lower cost and easier trading. Regulatory pressure to move OTC trading into central clearing mechanisms will drive listed adoption. Financial crisis of 2008 caused investors to revaluate credit of counterparties. Financial stability has caused credit fears to recede. Limited liquidity in listed products forces investors to use brokers to provide liquidity. Vertical clearing models inhibit liquidity. Market structure deters quoting. European investors are used to a very different market fragmentation. In Europe it is geographic whereas in the US it is fragmented at the exchange level. -European investment manager 100% 80% 60% 40% 20% 0% Proportion of Notional Trading Value OTC vs. Listed 34% 66% Europe OTC Europe 54% 46% US Listed Proportion of Notional Trading Value in OTC Instruments Source: Bank for International Settlements US TABB Group European Trading of US Listed Equity Options 2014 March 2014 20

Vertical clearing infrastructure at European options exchanges raises the cost of trading and creates isolated pools of liquidity European equity options trading is fragmented by country and clearing facility. Lack of fungibility among clearing houses inhibits market growth and liquidity creation. Fragmented clearing structure impedes capital allocation and reduces margin efficiencies. Equity Options Trading Volume by Selected Exchanges in 2013 (Millions of contracts) US Options Markets Eurex NYSE Liffe OMX Exchanges Meff Renta Variable Italian Der. Market Turquoise Derivatives TOM, The Order Machine Oslo Stock Exchange Warsaw Exchange Athens Der. Exchange Wiener Bourse Source: Futures Industry Association, Exchanges 140.2 35.5 32.1 22.2 16.1 13.7 4.5 0.8 0.2 0.1 4,111.3 523.4 Exchange Country/Region Clearinghouse Eurex Germany Eurex Clearing NYSE Liffe UK ICE Clear Europe OMX Exchanges Nordic/Baltic NASDAQ OMX Clearing Meff Renta Variable Spain BME Clearing Italian Derivatives Market Italy Cassa di Compensazione e Garanzia Turquoise Derivatives United Kingdom LCH Clearnet TOM, The Order Machine Holland Holland Clearing House Oslo Stock Exchange Norway Oslo Clearing, LCH Clearnet Warsaw Stock Exchange Athens Derivatives Exchange Poland Greece KDPW_CCP Clearing House Athex Clear Wiener Bourse Austria CCP Austria Budapest Stock Exchange Hungary Hungary Central Clearing House and Depository TABB Group European Trading of US Listed Equity Options 2014 March 2014 21

US options trading is fragmented across 12 exchanges but its horizontal clearing structure provides margin efficiencies and concentrated liquidity Institutional Investors Retail Investors Voice Instant Message FIX Electronic DMA Broker- Dealer OCC Clearing Member Automated Market Makers Floor-based Market Makers Clearing Through Source: TABB Group US broker-dealers spend significant resources on technology to support access to all exchanges. Smart order routing allows brokers to achieve best execution for clients. Burden of exchange fee complexity is managed by brokers. Horizontal clearing allows investors to direct order flow to exchanges with most advantageous trading model. Order flow is primarily directed at available liquidity. Low latency strategies prefer price/time priority exchanges. More passive retail flow generally routed to pro-rata exchanges. TABB Group European Trading of US Listed Equity Options 2014 March 2014 22

Profile of European Investment

US equity assets held by European investors surged in 2012 as new flows and equity valuations grew in favored high net worth and hedge fund locations The total value of equity holdings increased across most countries in 2012 as strong US equity market performance increased valuations. Countries with large concentrations of hedge fund assets enjoyed the largest increases. Locations managing high net worth accounts experienced sharp growth. Order flow into US listed options generally originates from countries with high levels of US equity AUM. Locations with large amounts of hedge fund AUM (UK, Nordic region, Switzerland and the Netherlands) account for the majority of activity. Private wealth accounts in Switzerland and Luxembourg with large US equity AUM use options for risk management and premium generation strategies. 600 500 400 300 200 100 0 Value of US Equity Holdings by Country (June 2012*) Europe Total: $1.85 trillion $US Billions It will be interesting to see the data on capital flows over the last six months as I expect there has been a significant uptick in inflows into European products. -European investment manager Source: US Treasury Department * Most recent data available 2012 2010 TABB Group European Trading of US Listed Equity Options 2014 March 2014 24

The magnitude of European investment in US equity assets fell in 2013 as returns boosted valuations and global allocations shifted to other regions European investors significantly reduced the value of investment into US equity securities in 2013. Rising US equity valuations increased total valuations, resulting in profit taking and more hedging activities Net 2013 US equity flows totaled $7 billion, one tenth of 2012 level. Economic recovery in Europe is attracting rising investor interest from international and European investors. However, global economic and political uncertainty will drive flows back to the US Exposure to dollar-denominated assets will climb as investors execute a flight to safety. Volatility product adoption will increase as investors seek uncorrelated hedges. 180 160 140 120 Equity Index Market Returns Jan-10 to Dec-14 US 66.6% UK 27.3% European Purchases of US Equity Securities Net Annual Totals $55 $73 100 80 60 Europe (Ex. UK) 19.5% $7 $US Billions -$32 2010 2011 2012 2013 Source: MSCI Source: US Treasury Department TABB Group European Trading of US Listed Equity Options 2014 March 2014 25

European institutional investors represent a large pool of capital with the potential to expand the use of listed derivatives in equity-related strategies Selected European Institutional Investor Sectors By Assets Under Management (AuM) 2013 Hedge funds $0.4 High net worth $12.4 Pension funds $2.2 Investment managers $13.6 Investment funds saw a 8.9% increase in assets under management in 2013 Undertakings for Collective Investment in Transferable Securities Directives (UCITs) funds accounted for $9.5 trillion in AuM, up 9% from 2012. Non-UCITs AuM increased by 8.8% to $4.0 trillion. High net worth AuM reached an estimated $12.4 trillion in 2013 as rising equity market valuations increased valuations by 13.8% from 2012. Concentration of high net worth accounts in Germany, UK, France and Switzerland. Pension fund assets are concentrated in the Nordic region. Investment strategies are driven by asset/liability relationships and focus on managing risk. All amounts in $US Trillions Source: OECD, EFAMA, Capgemini, TABB Group estimates TABB Group European Trading of US Listed Equity Options 2014 March 2014 26

Conclusions

Conclusions TABB Group estimates 9% of US listed options trading volume originates from investors domiciled in the UK and continental Europe. European investors turn to US options markets to hedge exposures, with significant interest in index and ETF products in times of market volatility. Investors will continue to be attracted to the competitive US market structure, deep liquidity and transparency. European-based hedge funds account for the largest share of demand, representing 55% of total European order flow. Private wealth managers are using more options in their strategies, accounting for 21% of total order flow, as US equity assets under management have risen in value. Proprietary trading firms accounted for 14% of total order flow, with investment managers accounting for 6% of total. European investor strategies are becoming more diverse and sophisticated with an increased focus on volatility strategies. Institutional investors are becoming more sophisticated in how they use US listed options, with multi-legged strategies becoming increasingly common. Low touch trading will continue to gain in importance, especially for smaller-sized orders originating from the retail and private wealth community. TABB Group European Trading of US Listed Equity Options 2014 March 2014 28