Range-bound volatility creates challenging market conditions for US options traders, forcing them into a more aggressive stance in a search for returns, says TABB Group in its seventh annual benchmark options trading study.
This is driving traders to refine their strategies by using options with more precise strike prices, looking for new opportunities and adjusting expectations to encompass a new environment with lower returns.
“It has become more difficult to find a profitable edge in options markets,” says Andy Nybo, TABB’s head of derivatives research and author of “US Options Trading 2013: Looking for the Edge.”
Not only is volatility range-bound, but traders are pressed to find liquidity in less actively traded options.
“As today’s lower volatility becomes the ‘new normal,’ forcing traders to be more efficient in their strategies, belt-tightening and gaining greater efficiency will better position them when volatility eventually returns,” says Nybo in recent commentary on TabbFORUM.com.
As buy-side trading desks become more comfortable trading options electronically, options traders are exploring the capabilities of both the technology as well as the availability of liquidity in the electronic markets displayed on their screens.
“Low touch trading has accounted for a fairly steady proportion of activity at both asset managers and hedge funds, with market conditions and volatility impacting usage over time,” Nybo says. “The need to improve efficiency in the trading process will be a primary driver behind the future adoption of low touch trading channels.”
To attract order flow from their clients, brokers need to support a broad range of client needs, including capable back-office systems and access to research. Although a fully staffed trading desk with execution expertise is a requisite first step, providing capital on-demand is critical in attracting clients looking to trade in size.
Still, traders tell TABB they want to remain important to their sell-side coverage, concentrating commission dollars with their top broker relationships. According to Nybo, one way they’re paying brokers is through options commissions.
“The buy side continues to rely on their brokers to support their need for capital, to have access to execution expertise, for market colour and research and access to company management and investor conferences.”
The 35-page annual study with 36 exhibits is based on interviews with 52 traders at hedge funds, asset managers and proprietary options trading firms, supplemented by conversations with additional market participants including multinational exchanges, institutional broker options trading desks, electronic execution desks and independent options trading system vendors. Firms participating in 2013 represent an aggregate USD6.8trn in assets under management.