The US futures industry is set to rebound in 2010 after trading volume suffered its first decline since 1995, according to a study by Tabb Group.
The combination of stricter risk controls across the brokerage industry and closure of hedge and proprietary trading funds were key factors behind the 23 per cent volume decline in 2009.
Based on Tabb estimates, trading is projected to surge 14 per cent in 2010 as interest rate volume recovers.
While risk management has always been critical, traders tell Tabb they have a new view of risk and reward, says Andy Nybo, a principal at Tabb, head of derivatives and author of the study.
“True, the bad news is that volume’s down, but there is plenty of good news ahead. Trading activity is beginning to stabilise, with pockets of strength in core asset classes such as energy, commodities and foreign exchange beginning to accelerate. As trading volume returns, rising open interest indicates that participants are using futures for ‘longer term’ risk management and commercial strategies.”
Nybo believes that futures will continue to become a more important weapon in the trader’s arsenal of tools used to manage risk and enhance exposure in desired asset classes.
“The events of the past year are clearly focusing attention on the use of futures as a way to better manage exposures across a broad range of asset classes.”
The study also highlights the continued importance of technology in futures trading, which Nybo expects to ultimately have a significant influence on the shifting market structure.
“As more trading is facilitated through direct market access, FIX-based trading schema and the increased adoption of execution algorithms, futures markets will increasingly become dominated by automated trading strategies. Trading will accelerate, and technology will become a prerequisite for actively trading in the futures market.”
According to Nybo, the role of high-frequency trading strategies in futures is destined to play an even greater role.
“Low latency strategies relying on co-location and optimised technology infrastructures play a large and growing role in the futures markets but the current market structure has mitigated their impact. Exchange competition, fragmentation and especially fungibility are the keys that will invigorate a whole new class of futures traders.”
He also points out that the intense scrutiny of the OTC derivatives industry by global regulatory officials will provide additional momentum to the industry.
“The increased regulatory focus on OTC instruments will eventually become an all-out stimulus package for the listed-derivatives industry, and the futures market stands to benefit greatly, as strategies that have historically used OTC instruments shift to the more transparent, listed futures marketplace.”
In the study’s conclusion, Nybo points out that the futures market is on the verge of a structural shift, as the combination of technology, the changing regulatory environment and a resurgence in risk management practices will drive market participants to reevaluate current market practices.
“The drive to move OTC instruments on to exchanges is a key factor behind this shift, and the industry will be keeping a close eye on Washington to see what legislation ultimately becomes final.”
