October 12, 2010

On the heels of sluggish trading activity from mid-year 2009 to mid-year 2010, U.S. institutions are hopeful about a recovery in equity derivatives trading volumes in 2011, but hardly bullish, reports Greenwich Associates.

Based on an analysis of the amount of commission paid by U.S. institutions to brokers on trades of options, Greenwich estimates average trading volume in options products declined some 20 percent from June 2009 to June 2010. The 187 institutions included in the research universe for the 2010 Greenwich Associates U.S. Equity Derivatives Study paid brokers a projected $715 million in execution and clearing commissions on options trades over that period. At the same time, average commission payments on futures trades declined 35 percent to $210 million — indicating a steeper slowdown in futures trading.

“The U.S. equity derivatives business clearly became smaller from year to year,” stated Greenwich Associates Consultant Jay Bennett, in the release “After a relatively strong start to 2010, business slowed dramatically in the second quarter and has yet to bounce back due to the general lack of conviction among institutions about market direction and the resulting lack of market activity.”

Looking ahead to 2011, 55 percent of U.S. institutions predict their use of flow equity derivatives will increase “somewhat” with another 3 percent predicting a significant increase. About 40 percent of institutions expect their use of these products to remain unchanged and only 1 percent expect their usage of flow products to decline. Meanwhile, nearly 80 percent of institutions expect their use of structured equity or securitized products to remain unchanged in 2011, with roughly 20 percent predicting an increase in usage.

“Activity in equity derivatives market is a function of broad investor sentiment, and at the moment investors are not confident about the durability of the economic recovery or the future direction of financial markets,” commented Greenwich Associates Consultant John Feng, in the release. “They are not confident, but they remain hopeful.”

With brokers competing for the “flow” business in equity derivatives (i.e., Delta One, Options and other Volatility Products) from U.S. institutions, Credit Suisse is cited as an important trading relationship in flow equity derivatives by a market-leading 63% of U.S. institutions. Goldman Sachs and Morgan Stanley are also named Greenwich Share Leaders for 2010. Both are named as important trading relationships by 58-to-60 percent of institutions, according to the Greenwich study.

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Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...