Panel Discussion on US Options and Volatility Market Structure

Day one of the 2015 European version of CBOE’s Risk Management Conference concludes with a panel discussion on the market structure of options and volatility in the US which will was moderated by Philip Stafford from Financial Times.  Topics to be covered include the demographics of users of these markets, a comparison of OTC versus listed products and ETF versus single stock options.  The panel includes Nikolas Alexandrou from Legal & General Investment Management, William J. Ellington of X-Change Financial Access, Rob Hocking from DRW Trading, Slade Winchester from Citigroup and Leaf Wade from UBS.

The theme across the board seems to be that buy side clients are becoming more sophisticated.  This appears to be happening with geographic expansion, an understanding of how liquidity providers trade, and ever evolving approaches to trading.

Geographic Expansion

Panel members noted a continued increase in interest in cross regional market trading in each region.  For example European traders want to look at the US and Asia, US traders looking to Europe and Asia, etc.  There is most definitely increased interest in the US option market among European traders.  It was specifically noted that European traders are interested in SPX options due to deep liquidity.  Also, there is increased interest in trading SPX and VIX options during extended trading hours.  It always takes more volume to get more volume which is common for a new method of trading.

Liquidity Awareness

Extended trading hours help with European volatility trading as it offers an extra source of liquidity and hedging for traders in Europe.  Another statement regarding extended trading hours is that there is ‘hidden liquidity’ where there are firms willing to trade if they see an order, but are not putting markets up when there is no volume.

A thought that I express when asked why we still have open outcry was illustrated during the discussion is that on very volatile days you want to have the human element involved in trading.  It was noted that CME closed their futures pits, but left the option pits open.  The bottom line is that there is a need for open outcry for large and complex orders.

An audience member chimed in regarding liquidity and noted he found more liquidity when trading the US option markets versus his home market in Europe.

New Trading Approaches

With respect to the use of capital, it appears institutions have greatly increased their sophistication with respect to the use of capital.  They are always looking for more efficient methods of deploying capital or looking for a cheaper method of hedging.  It was mentioned that Weeklys may allow institutions the ability to become more dynamic in their hedging activities.  Also, clients are willing to sacrifice direct correlation with respect to a hedge for being involved in a more liquid market since liquidity is needed during times of market stress and it tends to go away in less liquid markets.

For new products the thirst is for products that leverage current methods.  It was noted that VIX was probably the last big product and it is a leveraged exposure to the S&P 500.  This was attributed to the clients becoming more sophisticated.  Another example of the increase in sophistication was noted in the types of complex orders coming into the floor.  Instead of a 1 by 2 spread you may have someone looking to get a single quote to trade 1 by 1.25.