Demand for US Options Increasing in Europe, according to TABB

Sep 7, 2011

Demand for US Options Increasing in Europe, according to TABB Report

European investors are becoming increasingly interested in trading US listed options, according to the report released yesterday by the TABB Group and the OIC. An estimated 10% of US listed options trading volume originates from investors in Europe and the UK. Institutional traders there in particular have high levels of US equity holdings – about $1.3 trillion in US equity-related securities – and they find the US options strategies useful in managing risk in those holdings. TABB believes those levels of US equity investment will continue to support demand for US options, the report said.

European investors like the transparency, liquidity and execution quality of US listed options, the report found. The bulk of the US options activity comes from European hedge funds, who account for an estimated 58% of the European order flow. Private wealth management and proprietary trading account for 18% and 15%, respectively.

The author of the study, Andy Nybo, interviewed 29 individuals active in the US listed options arena about what they experienced as far as demand for the products, challenges in trading, and attributes of the US options markets that influence European investors to use US listed options. Those interviewed were broker-dealers, market makers, data providers, execution management system providers, US options exchanges, hedge funds, and traditional asset managers.

Holders of US equities can use a wide variety of options strategies to manage their exposure to US equities, Nybo told JLNoptions in an interview. They appreciate the availability of market data and the ability to see a two-sided market with very tight spreads and know that there is liquidity on the screen, and that they will get their order executed at or very close to the price they see on the screen.

Investor education has played a large part in increasing European interest in US options, although more is needed to raise awareness of options strategies and familiarize European traders with US options market structure, the report said. The complexity of the market structure, with nine different exchanges each with different trading protocols and pricing schemes, can be intimidating for those less familiar with the US markets, Nybo said. And the frequency of rule changes on these exchanges can be confusing.

The European options market is much smaller and less developed and trafficked than the US market, he added. Participants in the two markets tend to have different objectives and ways of trading.

There are still some barriers to European trading of US options, including the time difference. The US market doesn’t open until five or six hours into the European trading day and closes at well into the evening local time. So the ability of firms to trade these instruments through their existing technology and back office systems can be challenging, according to Nybo.

The study also found that more and more European firms are moving their operations over to the US, because of the need for low latency access. “When you have 3,500 miles of cable you need to connect, the time lag makes your strategy that much less effective. You need to be closer to the matching engine to be more competitive,” Nybo said.

“European hedge funds that trade a lot of US options also need to have the systems to support that activity and the staff expertise to make sure trades are executed most effectively,” Nybo added. “It is hard to build a comprehensive staff that is familiar with US options markets if you are 3,000 miles away. Firms that locate operations in the US are closer to that options expertise and staffing.”

Traditional asset managers represent a smaller portion of trading activity in US options, but TABB expects growth in that segment as well, as asset managers focus on reducing risk and improving returns. – Sarah Rudolph

(You can download the full report for free courtesy of the OIC at this link:

Editor’s note: JLN Options Newsletter will have a more complete interview with Andy Nybo on a number of different topics next Wednesday.

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