Trading | Derivatives D
erivatives trading volumes fell year-on-year in 2012 following a lacklustre performance from underlying cash instruments.
According to industry body the World Federation of Exchanges (WFE), primary equity markets recovered from their slump as global market capitalisation increased by 15% to reach US$54 trillion, a return to levels last seen in 2010. This positive turn was not shared by secondary equity markets, which saw trading turnover on electronic order books (EOBs) fall by 22.5% globally from 2011 levels. By volume there were 9.7 bn trades, down 14.3% from 2011, while the average transaction size grew slightly from $8,100 to $8,300, possibly showing a move towards less automated trading. The number of derivative contracts traded on-exchange fell by 21%, the first fall since 2004. Nevertheless, regulatory changes to the derivatives market, driven by the 2009 mandate of the G20, are intended to move as much of the over-the-counter (OTC) market onto electronic platforms as possible, while making OTC trading more expensive. Technology vendors expect that to drive electronic trading volumes back up, although the scale and speed of change is unpredictable. “We are currently conducting a study that has confirmed that on the voice side of the broker- dealer business, the average size of a deal is
around US$60 m,” says Mitch Stonehocker, director of the Front Arena platform at system supplier SunGard. “On the electronic side the average deal size is around $2m, but the total number of deals is vastly larger than on voice. It’s reasonable to conclude that the more electronic the market becomes, the higher the overall volume of trades. It is the same thing that happened in stocks.” “There is a lot happening in the brokers’ space and it is not easy for them to understand what is going to be traded on exchange and what isn’t,” warns Emmanuel Carjat, managing director at connectivity provider TMX Atrium. “It’s very difficult for them to understand how much volume might go there; part of it is that the size of deals is extremely high. Looking back at equities five years ago the size of tickets were an order of magnitude larger than they are today. That fall is what has driven a lot of the increase in volume.”
Preparation Trading technology providers are setting themselves up to support clients in this new high volume world. The firms themselves may not have strategies that reflect trading at high speeds, but the increase in the speed of market data and price movements that high-frequency trading (HFT) firms generate, are a phenomenon that more sedate firms have to handle.
“It comes down to being able to put all of these instruments in one place, and make your own decisions about their equivalence or otherwise… Different firms have different views on how well one instrument could offset another.” Steve Grob, Fidessa
Best Execution | Spring 2013
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