U.S. Options Commissions Projected to Soar as Buy-Side Remains Bullish

Increased volatility in the marketplace may be stoking investor concerns in some sectors, but it’s a driving force behind a potentially banner year for sell-side options desks with more buy-side firms turning towards options-centric strategies, according to a new report by Tabb Group.

The report, entitled “U.S. Options Trading 2010: The Resurgence of the Broker,” projects that industry commissions are expected to climb 15 percent to $3 billion on a 5.6 percent rise in trading volume.

This has attracted the attention of global options brokerages which are now moving to capitalize on the buy-side’s bullish position on options as well, Andy Nybo, the report’s author and head of derivatives at Tabb Group reveals.

“Global options brokers have seen the pot of gold and are building option desks by recruiting seasoned staff and providing deep capital support,” Nybo wrote in the report.

“Interest is broad and deep, coming from full-service, inter-dealer and agency brokers around the world, eager to increase revenues by targeting emerging demand for options trading at traditional asset managers, as well as hedge funds that survived the volatility throughout the financial crisis.”

The research found that strategies designed to protect position and enhance income have become commonplace. Meanwhile, veteran traders at traditional asset management firms along with the more aggressive hedge funds are moving to take on options-heavy strategies that leverage gyrating markets.

“As in any market, increased volatility and greater variations of prices attracts interest,” adds Nybo in an interview with Advanced Trading.

“So as prices go up and down and volatility fluctuates, you see more opportunity for firms to manage their trading models and strategies to kind of leverage that increased volatility.”

The report concluded that over-the-counter options remain a key tool for options traders since the ability to customize and create flexible structures outweigh the inherent counter-party risks tied to these instruments.

And although there is some concern within the trading community that new regulations may threaten OTC options, Nybo contends that options traders will continue to be reliant on them for the foreseeable future.

“They’ve become somewhat immune or jaded in terms of what new regulatory fiats may impact their activities,” Nybo says. Traders often opt for their preferred dealer counterparty when trying to move large block options transactions during times of high volatility or while dealing with less actively traded options.

“If you have an established relationship with a dealer, all it takes is a phone call to set up a transaction to meet your demands and needs,” Nybo adds.

“At the same time, you’re getting access to capital. You’re getting the trade done very quickly and you don’t have to manage an order in the marketplace.”

The report concludes that buy-side firms are hungry for research on volatility and fundamentals on underlying holdings, along with color on market activity which can best help them execute their trading strategies.

Meanwhile strategies centered around options are here to stay on the buy-side, Nybo says, adding that firms are clear about what they expect from their options brokers.

“They want access to capital; they want greater execution, and they’re getting it through a combination of direct market access, algorithms, and over the phone.”

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio