US institutions are increasing their use of highly liquid “flow” equity derivatives, but declines in asset values and a sharp fall in hedge fund trading activity have driven down both notional amounts of equity derivative trades and the amount of commissions paid by institutions on trades of these products, according to the latest report from research firm Greenwich Associates.
Usage of flow equity derivatives increased among US institutions last year across a range of commonly employed delta-one and option and volatility products, said Greenwich, which typically polls between 60 to 80 institutions in its regular surveys.
The proportion of institutions using listed/listed “look-alike” options increased to 88 per cent in 2009 from 79 per cent in 2008. While a stable 74 per cent of institutions traded single-stock options in 2008 and 2009, the use of index options increased to 72 per cent of US institutions from 59 per cent.
So what does all this mean? First, that US institutions clearly haven’t been deterred by all the adverse publicity on the dangers of derivatives trading and the need for reform in derivatives markets; and second, that the derivatives-related US job market is looking good, with continued high interest among institutions driving new demand from investment banks for equity derivatives bankers.
Interestingly, despite the increase in use, the amount of commissions paid by US institutions to brokers on trades of options products declined 20-25 per cent from mid-year 2008 to mid-year 2009. According to Greenwich, the decline can be attributed to two factors; first, the sharp drop in institutional assets under management last year; and second, hedge fund deleveraging.
Although the share of hedge funds using these options products remains high and has actually increased over a year in some cases, the absolute number of hedge funds active in the market fell, and those remaining had much smaller positions to hedge as a result of the deleveraging process, notes Greenwich.
The report suggests however that both commission payments and notional trading volumes will increase in the coming year. Fifty-two per cent of institutions say they expect to increase their use of flow equity derivatives, including approximately 10 per cent of institutions reporting that they plan to increase usage significantly. Investment managers and hedge funds appear more bullish in their intentions than mutual funds or pensions.
And last but definitely not least: the leading investment banks in North American derivatives. First is, surprise, surprise: Goldman Sachs, which according to Greenwich is the leading broker of equity derivatives in the US as measured by the share of institutions citing the firm as an “important trading relationship” in these products.
Credit Suisse ranked second, followed by JPMorgan, third, and Bank of America Merrill Lynch and Morgan Stanley in a tie for fourth place.
Related links:
Sweeping changes are on the way – FT
Why derivatives market reform means so much - TheGlobalist