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Transcript of Tabb presentation 9.17.13 public
September 17, 2013
US Options Trading 2013:Looking for the Edge
Andy NyboPrincipal, Head of Derivatives
TABB Group
Proprietary and Confidential
Agenda
Introduction and methodology Market conditions and strategies Liquidity challenges Technological necessity Broker services Key takeaways
2
Proprietary and Confidential
52 firms interviewed for the 2013 report 22 asset managers 26 hedge funds 4 prop trading firms
Total AuM of $6.8 trillion AM - $6.7 trillion HF - $50.6 billion Prop - $2.5 billion
Average daily trading volume for the sample totaled 644.6K contracts AM – 64.2K HF – 472.4K Prop – 108.1K
43%
49%
8%
Asset Managers Hedge Funds Prop
MethodologyParticipant Segmentation
$6.8 Trillion AUM
Population by Type 99.2%
.7%
.1%
3
Proprietary and Confidential
311,561,541 262,434,225
351,004,878
405,860,027
309,262,866 283,487,110
342,006,211 341,207,420 378,480,506
417,188,575
335,425,947 372,928,893
348,218,171
550,049,407
391,246,939 344,377,310
320,324,954 319,640,606
377,539,997
325,813,094 306,817,994 329,627,631 335,527,473
361,071,621 311,565,300
371,147,433 386,428,255 361,180,257
Monthly Options Trading VolumeJan-10 to Jun-13
Source: OCC, TABB Group estimates
2010
2011
2012
2013
P
3,899
4,563
4,003 4,224
Annual Volume
Note: All amounts in millions of contracts
Options volume estimates: 2010 to 2013P
5.5%-12.5%
US listed option volumes are flat year-to-date with volume projected to increase marginally in 2013
4
Proprietary and ConfidentialDec
-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
0
10
20
30
40
50
60
70
80
90
2012 – 2013 Closing LowMarch 15, 2013 – 11.3
2012 – 2013 Closing HighJune 1, 2012 - 26.7
Jan-12 Dec-12 June-13
Benign volatility is causing the buy side to refine strategies and adjust expectations to a new normal
Source: CBOE, TABB Group 5
Proprietary and Confidential
Yes68%
No32%
Have you adapted your strategy due to lower volatility?
How?
Manage ex-posure better
Lower volumes
Bigger Positions
Writing tighter strikes
Adjust expecta-tions
More precise focus
Replication
Spreads
Less vol selling
React faster
Less overwriting
32%
24%
21%
18%
15%
9%
9%
9%
6%
6%
6%
Traders are becoming more precise in their options strategies as they look to capture declining levels of edge
Source: TABB Group 6
Proprietary and Confidential
Less liquidity
More liquidity
More electronic trading
Tiered liquidity
Lower dealer capital
Lower margins
Weeklys
New products
17%
33%
17%
17%
11%
22%
11%
48%
13%
22%
26%
17%
13%
9%
13%
Hedge funds Asset managers
What has changed the most in options markets?
The sell side is tiering liquidity, creating challenges for aggressive trading strategies requiring capital
Source: TABB Group 7
Proprietary and Confidential
Proportion of Volume Traded by Symbol
2007 2008 2009 2010 2011 2012 2013:H2
30% 35% 36% 36% 40% 39% 41%
21%22% 21% 22%
22% 22% 21%12%
10% 11% 11%10% 11% 10%
25%24% 23% 22% 20% 21% 20%
12% 9% 9% 9% 8% 7% 7%
Top 10 names 11 to 50 51 to 100 101 to 500 501 and above
72% of all
volume is in top
100 names
8
Liquidity is becoming concentrated in the top 100 names with tighter markets and less available edge the result
Source: OCC, TABB Group
Proprietary and Confidential
20132012
50%
11%
Asset managers
20132012
65%
58%
Do you use weeklys in your strategies?
Hedge funds
The buy side is increasingly using weeklys in strategies as liquidity builds and product availability expands
Source: TABB Group 9
Proprietary and Confidential
0
10
20
30
40
50
60
70
80
90
100
0%
5%
10%
15%
20%
1%
4%3%
6%
3%
6%7%
5%
9%
6%
11%
8%
12%
8%
10%11%
12%
14%15%
12%
16%
14%
16%
14%
18%
20%
15%
19%
22%
Weeklys Volume (Left Axis) % of total volume (right axis)
Volume in millions of contracts
Liquidity will continue to build with volumes expected to reach 25% of total volume over time
Source: OCC, TABB Group 10
Proprietary and Confidential
Technological necessity
Proprietary and Confidential
What projects?
Back office
Analytics
Entire infrastructure
New ETS
Spread trading capability
Broker neutral ETS
OTC pricing
Low latency platform
29%
29%
14%
14%
14%
33%
11%
22%
11%
11%
11%
11%
Hedge Funds Asset Managers
New technology projects are on hiatus; current priorities are targeted at efficiencies across the trading process
Source: TABB Group 11
Yes39%
No61%
Have you implemented any new technology projects for options trading?
Proprietary and Confidential
Electroni
c36%
Voice
64%
Electroni
c97%
Voice
3%
Electronic markets, market complexity and tiered liquidity are driving the use of automated trading tools
Buy side accounts Market Making Firms
What trading channels do you use for options (2012)?
Source: TABB Group 12
Proprietary and Confidential
Higher volumes
Screen liquidity
Commission savings
50%
25%
25%
29%
43%
29%
Hedge funds Asset managers
What would influence you to use more low touch order channels?
Future gains in electronic trading will come from higher volumes and efforts to reduce trading costs
Source: TABB Group 13
Proprietary and Confidential
Broker Fighting for Market Share
Broker services
Proprietary and Confidential
How would you rank your top broker in the following service areas?
Research qual-ity
Market colorCommission rates
Back office support
Availability of capital
Execution expertise
Trust to work an order
3.7 3.8 3.6
3.8 4.1 4.1 4.2
3.74.04.1
4.34.54.54.7
Second place broker Top broker
Trust, execution and access to capital drive the broker selection process
Source: TABB Group 15
Proprietary and Confidential
Asset managers
Hedge funds
29%
56%
52%
21%
7%
7%
4%
7%
5%
5%
3%
4%
Execution Capital Research Relationship Technology Back office
How would you allocate $1 of commission spend?
The value of commission spend differs depending on strategy and type of order flow
Source: TABB Group 16
Proprietary and Confidential
Key Takeaways
Proprietary and Confidential
Key takeaways The benign volatility environment is forcing buy side traders to
chase edge Traders are refining strategies as lower volatility reduces opportunity Traders are exploring new products and asset types
Tiered liquidity is challenging buy side traders Liquidity is concentrated in top 100 names causing tighter markets and
reduced edge Brokers are becoming more judicious when allocating capital
Low touch channels are important for more liquid options Use of DMA, complex orders and algos is critical in more liquid options The complexity of strategies is also driving technology adoption
High touch, full service brokers are essential but lower commissions are forcing brokers to rationalize service offerings Competition from electronic execution and agency brokers is pressuring
commission levels Full service brokers still dominate due to the need for capital and support
for larger and more complex trades18
Proprietary and Confidential
2013 Derivatives Research Calendar Fourth Quarter 2013 Research Calendar
European Demand for US Listed Options Factors Influencing the Use of Options by US Mutual Funds US FCM Business 2013 The Value of Retail Options Order Flow
2013 Published Research US Options Trading 2013: Looking for the Edge US Options market Making 2013: Scale Scope and Survival Cross Listing: The Tension of Cooperation OTC Equity Derivatives: Harnessing the Liquidity US Futures Market: State of the Industry 2013 Monthly Options Liquidity Matrix
19