Celent Predicts Electronification of Exchange Traded Products to reach 85%

In a new Celent report, Electronic Equity Options Trading: A Technology Transformation for a New Market Structure, Celent predicts that electronification rates of US exchange-traded options will reach 85% of overall volumes in 2012 from 71% in 2008, as more institutional block and complex orders move to automation.

Listed equity options contract volumes are projected to grow at a rapid CAGR of 25% until 2012, due to increasing traditional investment manager interest, growing buy side utilization of option algorithms, the benefits of portfolio margining, and decimalization. Greater messaging volumes, quotes, and option strikes will mandate technological enhancements from all market participants, including brokers, exchanges, specialists, market makers, and the buy side.

“Options markets are still comparatively fragmented in liquidity and see a greater volume of messaging and quote updates than cash equities. With a market structure which effectively only allows trades to be executed on exchanges, systems enhancements have been historically concentrated on these exchanges,” said David Easthope, senior analyst with Celent's Capital Markets group and coauthor of the report, in a press release. “Technological responses to the trading arms race will be widespread and come in the form of direct market access (DMA), multiasset trading capabilities, algorithmic trading, hardware and software upgrades, and colocation offerings.

Moreover, consolidation and convergence will be key trends in the industry as less adept players are sidelined in an increasingly tougher technological game. “Seven independent exchanges have now been reduced to five, but market practice and uncertainty have kept the old models alongside the new for now,” says Chermaine Lee, analyst with Celent's Capital Markets group and coauthor of the report, in a press release.