TABB Group Says Buy-side Traders Will Increase Use of Options Algorithms

Options algorithmic trading is on the cusp of transformation and according to TABB Group, a new breed of algorithmic trading tools is already providing U.S. buy-side traders with a significant advantage over point-and-click traders of yesteryear. Whether it is for a delta hedging strategy or a contingent, multi-legged strategy that executes across multiple asset classes, algorithmic tools designed to simplify the options trading process are finding a broad and growing user base at proprietary trading institutions, hedge funds and traditional asset managers.

In a new research report, “Options Algorithms: Moving Beyond the Smart Order Router,” TABB Group senior analyst Andy Nybo, its author and head of the firm’s expanding derivatives research service, said in a press release that “trading strategies are increasingly incorporating complex mathematical analysis into real-time trading decisions, creating the need for systems that can manage and adapt to a new, more intensive trading environment that relies increasingly on technology to be successful. As complex strategies become more commonplace, traders are turning to algorithms to automate transaction processes,” he added.

As a result, TABB Group says the industry will invest $191 million in 2008 to support the necessary foundation for options algo trading infrastructures, rising to $216 million by 2010, a compound annual growth rate (CAGR) of 26%. The increased adoption of algorithmic trading tools in the U.S. will contribute to the growing trend towards low-touch trading, where orders are executed without the assistance of a broker, said Nybo, in the release. “As option traders begin to utilize algorithms to help manage their more complex trading activities they will require less assistance for trading support from brokers and instead demand increasingly sophisticated technology to support their trading strategies,” he added.