The Evolution of Options and Futures Strategies on the Buy-side Trading Desk. Andy Nybo Partner, Head of Research and Consulting

Transcription

1 The Evolution of Options and Futures Strategies on the Buy-side Trading Desk Andy Nybo Partner, Head of Research and Consulting CBOE RMC Europe September 26-28, 2016

2 Agenda Introduction Trends and drivers Regulatory influences Trends in US derivatives trading Final thoughts Panel discussion 2

3 Macro trends and drivers Global regulatory pressures to reduce systemic risk is shifting demand towards exchange traded products Capital efficiency (Basel III) will drive future adoption as brokers tier risk exposures based on client type Aggressive trading strategies are being forced to use listed products as brokers restrain credit extension Equity-based index derivatives are becoming a bigger part of investment strategies Institutions are using more index derivatives in strategies as investment mandates expand Increased volatility will reinforce demand for risk management activities Market participants continue to gravitate to instruments providing efficient exposure and lower costs Cost to trade is becoming a bigger consideration, especially the cost to enter and exit position Liquidity remains paramount, especially when volatility surges and its time to exit a trade 3

4 Regulation 4

5 Regulatory focus on bank capital and reducing risk is changing the derivatives trading landscape Basel III forcing re-pricing of risk Banks need to Increase Tier I capital from 2% to 6%; 2.5% surcharge for larger organizations Some countries are layering on higher capital buffers Banks are shuttering down risk-taking business Volcker Rule on Proprietary Trading Proprietary trading by banks is gone Reduced liquidity in most risk markets Completely changes the listed derivatives trading landscape Capital is expensive; relationships determine availability Liquidity being provided by prop trading firms Less bank capital is forcing investors to absorb more risk 5

6 Reduced capital is forcing banks to cut leverage and take less risk in their customer activities Banks have less capital to deploy To take positions To take on client risks To provide capital to investors Risk is shifting to liquidity providers, end users and investors You see this with increased volatility Flash crashes (not per se, but increased use of circuit breakers) ETF problems in August 2015 Greater air pockets bids/offer gaps 6

7 Risk provision is no longer simply a function of size, instead it is transitioning to a service based on technology capabilities With technology comes more efficiency More efficiency = fewer traders Fewer eyeballs = fewer traders managing risk Fewer traders managing risk = smaller risk More technology = more speed Need to pay closer attention to markets Instead of dealers putting up size, they amp up speed Instead of putting up 500 contracts which they hold for 5 min, they put up 5 contracts which they turn over in 10 seconds More easily manage risk exposure, change directions or pull markets 7

8 Structural shifts are driving the use of technology, with speed and efficiency becoming increasingly critical to the industry Volume by Execution Channel US Listed Options US Futures 2% 5% Market makers 96% 90% 2% 5% Institutions 28% 30% 42% 75% 17% 8% Automated/algo Point and click Voice Source: TABB Group 8

9 Impact on US derivatives markets 9

10 US options volume saw strong growth until 11; low volatility, less demand and regulatory reform has caused volumes to stagnate 6 5 Billons of contracts CBOE VIX index Jan-02 to Sep-16 Average VIX: Source: OCC, CBOE, TABB Group estimates 10

11 Options traders are seeing the consequences of more regulation: less liquidity and lower market quality What has changed the most in options trading over the past year? Less liquidity 51% Fewer counterparties 21% Dealers not providing capital 19% More products to trade Spreads have widened out 19% 41% 14% 36% More electronics 12% 27% More VIX Usage 9% Regulation on bank capital 7% Violent price swings 7% 5% Importance of broker Faster trading 7% 7% Fewer counterparties willing to take risk Dealers not providing capital Spreads have widened out Regulation impacting bank capital Source: TABB Group 11

12 ETF and index volume continue to see momentum, SSO volumes have plateaued as active management strategies migrate to ETFs Index options Millions of contracts Index CAGR 2006 to 2015: 9.5% Total volume in 2015: 416MM Market proportion in 2015: 10% ETF options Billions of contracts ETF CAGR 2006 to 2015: 18.0% Total volume in 2015: 1.5B Market proportion in 2015: 37% Single stock options Billions of contracts Single stock CAGR 2006 to 2015: 4.3% Total volume in 2015: 2.2B Market proportion in 2015: 53% Source: TABB Group 12

13 Short term expiries have seen strong growth; trading velocity & structural characteristics require faster analytics & technology Volume of Options with Weekly Expirations Weeklies Volume (Left Axis) Weeklies as a % of total volume (Right Axis) 35% 30% 25% 20% Weeklies now have 5 expirations (not including regular expiration) There are 460 symbols that have weeklies vs. 338 in 2014:Q1 15% 10% 5% 0% Source: OCC, Hanweck Associates, TABB Group estimates 13 13

14 Liquidity has become concentrated in the top 100 names as trading velocity accelerates & traders look for liquidity Top 100 names = 76.3% of total volume 2016:Q1 45.5% 21.6% 9.2% 17.3% 6.3% % 20.6% 9.3% 18.5% 7.4% % 19.1% 9.4% 20.2% 8.2% Top 100 names = 71.5% of volume Top 10 names 11 to to to and above Source: OCC, TABB Group estimates 14

15 Products offering liquidity, flexibility and improved risk management characteristics are seeing higher demand What products offer the greatest potential for your activities? (Ranked 1 to 5, 5 Highest) Weekly options 3.7 Extended hours SPX options VIX products Extended hours VIX options Short term VIX products Flex options FX options products IR options products Daily options 1.9 Source: TABB Group 15

16 Futures volumes are subject to many of the same drivers, with global demand for liquidity contributing to market growth 3, P CAGR +12% 2,645 2,850 2,328 2,765 3,056 2,690 3,060 3,175 3,214 1,653 2, P CAGR +8% 1, ,043 Note: All amounts in millions of contracts Source: FIA/TABB Group 16

17 VIX futures have seen substantial growth, especially after the extreme volatility of June 2011 June Year CAGR +42% Millions of contracts Source: CBOE, TABB Group

18 Not only are VIX futures volumes increasing but extended hours trading (ETH) is gaining traction as hedging needs evolve 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 VIX extended hours trading Jun-16: Brexit Sep-16: US rate policy shift 17% 15% 13% 11% 9% 7% 5% ETH as a % of all trading 18 VIX ETH as a percentage of total Note: All amounts represent average daily contract volumes. September averages as of 9/16/16 Source: CBOE, TABB Group

19 Demand for liquid hedging tools is also driving demand in SPX and VIX options, both in regular and extended hours VIX options SPX options 1,000, , , , , ,400,000 1,200,000 1,000, , , , , ,000 5,000 4,000 3,000 2,000 1,000 0 VIX ETH options SPX ETH options 19 Note: All amounts represent average daily contract volumes. September averages as of 9/16/16 Source: CBOE, TABB Group

20 App Polling Questions Question #1 for Andy Nybo Session: How desirable do you believe it is for customers to have access to VIX FUTURES during Extended Trading Hours (ETH)? A) Very Customers highly value the ability to trade VIX futures outside of US market hours. B) Moderate For certain irregular, highly volatile events, ETH is beneficial. C) Low Except in extreme circumstances, Customers prefer to wait for the opening of the regular US trading day to trade VIX Futures. CBOE HOLDINGS 20

21 App Polling Questions Question #2 for Andy Nybo Session: How desirable is it for customers to have access to SPX and/or VIX OPTIONS during Extended Trading Hours (ETH)? A) Very Customers highly value the ability to trade SPX and VIX options outside of US market hours. B) Moderate For certain irregular, highly volatile events, ETH is beneficial C) Low Except in extreme circumstances, Customers prefer to wait for the opening of the regular US trading day to trade SPX or VIX Options. CBOE HOLDINGS 21

22 Final thoughts 22

23 Derivative markets will benefit from more regulation (mostly), rate shifts, volatility, technology, and rising demand from end users Global regulation is shifting demand towards exchange traded derivatives Capital efficiency is forcing firms to evaluate all costs to trade Brokers are proactively tiering clients to minimize risk Market volatility expected to increase as economic growth accelerates and monetary policy shifts Anticipation around monetary policy changes will sustain volatility Sustained volatility will entice new market participants into derivatives Institutional investor demand for liquidity continues to grow as more funds use derivative strategies Risk management policies encourage the use of derivatives for hedging More sophisticated strategies are driving volumes Technology is a critical factor supporting growth Strong technology foundation is crucial to support industry growth Structural complexity is forcing firms to automate activities 23

24 Panel discussion Jared Dubin, Head of Systematic Strategy Research, LMR Partners John Fennell, Executive Vice President, Financial Risk Management, OCC Patrick A. Luongo, Head of AES Options Sales, Credit Suisse Alex Orus, Founder and Partner, Principalium Capital AG 24