Hedge Funds and Traditional Asset Managers in North America Invest $253 Million in 2008 on Low-Latency Trading Option Infrastructure, Rising to $305 Million in 2011, a 6% CAGR
Although the use of complex structured products on Wall Street will decline and the credit markets will become more regulated, says TABB Group in a new research report published today, “Low-Latency Options Trading: Unraveling the True Meaning of Speed,” growth in the 40-year old exchange-traded options market is accelerating.
Electronic options’ trading continues to become the norm and acting as a catalyst for the volume spikes witnessed during the past two years, explains Kevin McPartland, senior analyst at TABB Group and author of the report. “Financial firms on both the buy side and sell side are looking at new ways to profit from this technological innovation and increased market accessibility. Although trading strategies vary wildly amongst market participants, a single element takes center stage repeatedly – speed.”
He adds that a better definition of low latency at each stage of the trading process for options trading – when market data is received and disseminated, trading opportunities identified and validated and orders generated – is needed desperately. “Options are not equities, pricing analytics are not quote engines and neither should be measured on the same scale.”
While economic forces and easier access drive demand, regulations and changes in market structure are affecting how market makers, hedge funds and proprietary trading desks generate profits. Both factors, he says, increase the criticality of ingesting massive amounts of incoming market data through direct feeds, making trading decisions and executing on the exchange faster than ever before.
Although sell side firms will outspend the buy side on direct feeds, TABB Group estimates that in 2011 buy-side firms in North America will spend $17 million a year on direct feeds for options trading, which does not include the cost of additional technology necessary to implement the incoming data. McPartland notes that because hardware solutions are well suited for the options environment, technology vendors are working to integrate hardware acceleration and more traditional, software-based messaging into a single solution.
As trading algorithms and smart order routing (SOR) have been embraced by options traders, so has the use of complex event processing (CEP) to power them. As a result, TABB Group forecasts that the buy side and sell side will increase spending at a 12% CAGR on CEP technology to support options trading through 2011.
In addition, TABB Group estimates that in 2008, hedge funds and traditional asset managers will spend as much as $253 million on low-latency options infrastructures, rising to $305 million in 2011, a compound annual growth rate (CAGR) of 6%, figures that do not include the additional millions of dollars in fees and commissions paid to brokers for access to their existing infrastructures.
“In 2008, listed-options trading volume has soared to 14.6 million contracts daily, according to the Options Clearing Corporation, a 28% increase from the 11.4 million daily average seen for the full year 2007. There is considerable room for growth in options trading volumes, especially from high-frequency trading strategies that require low-latency applications,” comments Andy Nybo, senior analyst and head of TABB Group’s derivatives research service. “IT vendors who can understand their clients’ needs and traders who understand where reduced latency can enhance profits will ultimately gain.”
The 20-page research report can be accessed by TABB Group Research Alliance Derivatives Service clients and qualified media at https://www.tabbgroup.com/Login.aspx. To request an executive summary or to purchase the report, please visit http://www.tabbgroup.com or write to info@tabbgroup.com.
