Flow business benefits
While the structured products business is having a tough time as a result of poor performance and lower demand, the flow business is enjoying record volumes, particularly for exchange-traded options.
In the US the average daily trading volume of equity options on exchanges has now reached nearly 14 million contracts, up from just 1.6 million only 10 years ago. In one day in September last year as many as 30 million contracts changed hands.
Sang Lee, chief executive of consultancy Aite Group, attributes the strength of the growth in options trading to a strong confluence of factors.
"There are really a number of factors feeding on each other," says Lee. "The rise in volatility has helped drive up trading volumes and push some OTC transactions on to exchanges, but there are also structural factors at play. The advent of the maker-taker market model has revolutionized the market by encouraging greater participation from active traders using high-volume algorithmic strategies. Traditional fund managers have also increased their use of options over the years. The introduction of decimalization and penny pricing in the US has also arguably helped increase volumes on exchanges, although some might argue that it might actually have hurt institutional traders looking to trade in greater size."
The use of options by institutional investors has increased significantly over the years; institutional clients are now projected to displace retail investors as the biggest client segment by the end of 2009, when they are expected to account for up to 57% of the options client base.
High-frequency traders are also increasingly important in the equity options market. Aite Group expects to see approximately 40% of trading volume accounted for by high-frequency trading firms by the end of 2010.