Andy Nybo is principal and head of derivatives at the TABB Group. He also serves as a lead consultant for derivatives-related consulting assignments and provides counsel to clients on the use of technology on derivatives trading desks. He has more than 25 years of experience in the global capital markets. His published research includes: “Exchange-Traded Equity Derivatives: The Buy-Side’s Increasing Exposure”; “Cross-Asset Trading Systems: Controlling the Trader’s Desktop”; and “Global Exchanges and Depository Receipts: Can They Coexist?”
Last week he published a study for TABB on the demand for US options trading in Europe, which can be found here: http://www.888optionsnet.com/select/direct_login.asp?content=doc-european_tabb. He talked with JLN Options editor Sarah Rudolph about his experience in the business, the challenges in the current options market, and how he conducts the TABB reports.
Q: How did you get started in the financial business, and with TABB Group?
A: I began in the public finance side of the business. Back in the roaring ‘80s, I spent more than 15 years at the Bond Market Association (now part of Sifma), running their research efforts. Towards the end of my tenure there, electronic trading and fixed- income markets became hot-button topics with the Internet’s evolution, which piqued my interest in the technology side of the business. My initial focus was on how technology was changing market structure and the impact it was beginning to have in the financial markets. After the BMA, I joined Larry Tabb, when he was starting the global securities and investment practice at Tower Group.
After Tower, I moved to MarketAxess and their electronic bond trading platform. I ran its marketing effort for three years before Larry asked me to join him at TABB Group, where I’ve been for the past five years. I manage our derivatives practice, focusing on the front-end side of the business, specifically how the front end is evolving through the use of technology and how the industry is adapting to the rapid change in market structure.
Q: How do you choose the people you interview for the reports?
A: TABB Group publishes multiple types of research, including vision notes, lengthier reports and their benchmark, interview-based studies. We talk to upwards of 300 market practitioners a year in equity derivatives alone and more than 700 people in three asset classes combined – equities, derivatives and, our new practice, fixed income. And all of these in-depth interviews are conducted one-to-one.
Q: Have you ever been really surprised by the findings in one of your reports?
A: Constantly. When you’re able to aggregate a bigger picture of the markets by talking to clients and key industry players frequently, you run across some rather surprising findings. For example, we’ve learned that the exchange-traded derivatives business is still a relationship business. The phone is critical at any trading desk, and the sales trader is not going away.
Even though electronic trading is critical to certain types of activities and strategies, there’s a tremendous role for full-service brokers that provide capital and service to their clients.
Q: So brokers are continuing to play a crucial part in options trading?
A: Absolutely. Brokers are essential to options trading in numerous ways. Their clients, whether they’re infrequent large block traders or traditional asset managers using a call- writing strategy, will pick up the phone and trade with the best broker to get that trade done. That’s partly because the asset manager may only trade once a week and needs capital to get their trade done, or they want to get a better understanding of what’s going on in the markets.
Brokers are also providing high-touch service to less tech-intense firms, but they’re also active in building out electronic platforms for their client base. As our research has shown, brokers provide a full spectrum of services from high to low touch for their client base.
Q: What is the biggest technology concern for buy-side and sell side desks at the moment?
A: Over the past 10 years, the options industry has seen tremendous growth in the level of trading and types of investors active in the market. Institutional investors are becoming a much bigger part of the U.S.-listed options market, as are firms looking at using more quantitative, relative value strategies, including high-frequency trading accounts. Add uncertain times and greater volatility to the mix and you end up with a recipe for record volumes. Economic difficulties, the potential for a double dip and the debt crisis in Europe all add up to uncertainty. What the financial markets do in a time of uncertainty is become more volatile. Volatility is the options trader’s Nirvana.
This rising demand causes volumes to go up and markets to move much faster, and it requires firms to invest in the systems and technology to support this rapid environment. With nine U.S. options exchanges, there’s added complexity. There’s also a need for better analytics and bigger, faster data pipes and systems, all supporting trading activity and providing direct market access to and from clients, as well as back-office processing to support allocation.
Q: Do you think the recent interest in volatility products will continue?
A: I think volatility has emerged as an asset class. At TABB Group, we are conducting research looking at volatility and market structure, how firms are developing new products and how volatility impacts new trading strategies form various perspectives. Trading in VIX products in times of volatility has been a huge focus of the options industry.
Q: About a year ago you wrote that the complexity of the different pricing structures at the various U.S. options exchanges was discouraging some market makers from trading. Is this still true?
A: The U.S. options market structure is very complex. Because there are nine exchanges competing to attract order flow, they are altering their market structures frequently in order to attract that flow. Market makers have to manage all the rule changes for each exchange. It’s a very complex process as they have to update systems and routing tables and smart-order routers. Often one simple change has multiple effects on their trading model. It is definitely a challenge for large, small and medium-size firms.
Q: What is the competitive challenge to market makers from high frequency traders?
A: The challenge for a lot of market makers is investing in the necessary technology to support their activity. As markets accelerate, the technology bar is raised substantially. The need to invest in existing systems and the capital required for that is very high, compared to a proprietary trading firm or a small trading firm using a high-frequency trading strategy, starting from scratch.
Q. How does the market compare with, say, ten years ago, as far as transparency?
A: It’s certainly more transparent now. With nine U.S. exchanges and all the attention focused on options in recent years, the wealth of data and the types of systems available to support the needs of options traders has been impressive. That includes direct feeds from exchanges and more information available at your fingertips on what types of trading is occurring, whether from trade alerts or electronic eyes. Those technologies allow everything to be done more efficiently. One of the key findings in the report on European trading of U.S. options that I just published was that European traders love the transparency and ease of use of the U.S.-listed options market. Investors have much more control at their fingertips and are more able to do analysis across their trading desks.