Following a slowdown in trading activity from mid-year 2009 to mid-year 2010, US institutions are hopeful about a recovery in equity derivatives trading volumes in 2011, but hardly bullish.
Based on an analysis of the amount of commissions paid by US institutions to brokers on trades of options, Greenwich Associates estimates average trading volume in options products declined some 20 per cent from June 2009 to June 2010.
The 187 institutions included in the research universe for the 2010 Greenwich Associates US Equity Derivatives Study paid brokers a projected USD715m in execution and clearing commission on options trades over that period.
At the same time, average commission payments on futures trades declined 35 per cent to USD210m, indicating an even more pronounced slowdown in futures trading activity.
“The US equity derivatives business clearly became smaller from year to year,” says Greenwich Associates consultant Jay Bennett. “After a relatively strong start to 2010, business slowed dramatically in the second quarter and has yet to bounce back due to the general lack of conviction among institutions about market direction and the resulting lack of market activity.”
Looking ahead to 2011, 55 per cent of US institutions predict their use of flow equity derivatives will increase “somewhat” with another three per cent predicting a significant increase. About 40 per cent of institutions expect their use of these products to remain unchanged and only one per cent expect their usage of flow products to decline.
Meanwhile, nearly 80 per cent of institutions expect their use of structured equity or securitised products to remain unchanged in 2011, with roughly 20 per cent predicting an increase in usage.
“Activity in equity derivatives market is a function of broad investor sentiment, and at the moment investors are not confident about the durability of the economic recovery or the future direction of financial markets,” says Greenwich Associates consultant John Feng. “They are not confident, but they remain hopeful.”
