As the interbank dealers lick their wounds, exchange traded options and futures are booming

Whilst many of the interbank electronic trading giants are engaged in restructures and redundancies as a result of 2015’s stifling losses, exchanges in North America are making hay. It is becoming clear that investors and traders are taking further interest in options and futures contracts as a staple when managing their portfolios, rather than spending […]

As the interbank dealers lick their wounds exchange traded options and futures are booming

Whilst many of the interbank electronic trading giants are engaged in restructures and redundancies as a result of 2015’s stifling losses, exchanges in North America are making hay.

It is becoming clear that investors and traders are taking further interest in options and futures contracts as a staple when managing their portfolios, rather than spending cash reserves.

As a result, a boom has occurred, signs of which became clear at the end of last year when many OTC FX firms began to look toward offering multi-asset trading on a contract for difference (CFD) basis rather than the usual spot transactions that had long been the mainstay for many retail OTC firms.

As an example, volumes at CME Group Inc (NASDAQ:CME), including trading in EURUSD interest rate options, rose by a remarkable 15% to 1.4 contracts per day.

As 2015 gave way to 2016, volumes at CME increased by 37% year on year to an average of 4.3 million contracts per day which was congruent with an upturn of volumes at other exchanges recently.

Options can represent a cheaper and more flexible method of broadening portfolio exposure to various asset classes, a facet that many FX firms are now well aware of, with the added advantage of not moving the market price against themselves.

In terms of risk management, options contracts have a built-in ‘insurance’ which can protect portfolio against sudden changes in prices within a defined period, which is increasingly a consideration following the exposure to negative client balances which was experienced by many OTC firms in January 2015 when the Swiss National Bank removed the 1.20 peg on the EURCHF pair, causing the insolvency of a series of retail brokerages.

Andy Nybo, an Analyst at capital markets consultancy TABB Group today told the Financial Times

“For the most part, regulatory reserve requirements for options on futures contracts are lower than for regular futures contracts. For example, asset managers seeking to effect rebalancing programs will have greater costs when purchasing a basket of underlying equities or bonds in terms of fees and market slippage.”

 

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