October 16, 2012

Trading in equity futures and ETFs tne North America and the United Kingdom is rapidly migrating to electronic platforms, reports Greenwich Associates in its 2012 equity derivatives study.

The share of futures trading volume executed electronically soared to 48 percent in 2011-2012, from 38 percent the prior year. North American hedge funds and insurance companies are now executing approximately two-thirds of their futures trading volume on electronic platforms.

In the United Kingdom, the share of futures trading volume executed electronically grew to 42 percent in 2011-2012 from just 24 percent the prior year. The increase stems from European hedge funds— the majority of which are domiciled in the United Kingdom — increasing the share of their futures trading volume routed through electronic platforms to 42 percent from 24 percent, said Greenwich.

ETF volume is also moving to electronic platforms. Approximately half of institutional ETF trading volume in the U.S. was executed electronically in 2011-2012, up from just 36 percent the prior year. In the United Kingdom, electronic trading more than doubled over the 12-month period to 42 percent of total ETF trading volume and almost doubled among European hedge funds to 61 percent

In options trading, the study revealed 20-to-25 percent of volume is executed electronically by investors in North America and on in continental Europe. However, in the United Kingdom investors use electronic execution for less than 10 percent of their business.

While Greenwich sees the move to centralized clearing and other factors as accelerating the transition of futures trading to electronic platforms, the global equity derivatives market is not rushing to electronic execution en masse, the research consulting firm said.

Pointing to structural features of the European market, at a most basic level, the firm cites country/currency fragmentation and a large number of relatively illiquid small- and mid-cap issues within national markets as representing hurdles to growth for electronic platforms. Those factors help explain why, in continental Europe, the share of futures and ETF trading volume executed electronically actually decreased slightly from 2011 to 2012.

“We believe futures, ETFs and – albeit to a lesser degree because of capital commitment issues – options trading business will continue to move rapidly to electronic platforms due to a confluence of two trends,” commented Greenwich Associates consultant Jay Bennett, in the firm’s press release. “First, the changes to derivatives market structure that are still playing out. Second, the economic pressure on both buy-side investors and sell-side brokers to reduce costs and cost-to-serve. In the current environment, electronic execution is a way to lower costs of execution and client coverage.”

At the same time, the firm announced its 2012 Greenwich Share and Quality Leaders in Equity Derivatives Trading in North America and Europe. The top five brokers cited for futures market penetration in North America for 2012 are: Goldman Sachs (41 percent), Bank of America Merrill Lynch, (35 percent), Morgan Stanley (34 percent), JP Morgan (28 percent), and Citi, 26 percent. The relationship rankings are based on interviews with 92 institutions which included distinctive service evaluations, and mentions for transactions in specific futures products including, index, VIX, single stock, sector or dividends.

In options & volatility product market penetration for North America, Morgan Stanley, Bank of America Merrill Lynch and Goldman Sachs tied with 57 percent, while Barclays and Credit Suisse each had 50 percent, Deutsche Bank came in fourth with 45 percent and Citi followed with 44 percent.

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