Market Participants Upbeat Despite Muted Volumes

Terry Flanagan

Although trading volume in equities and options are off from year-ago levels, market participants assert that it’s only a matter of time before it comes back.

Options trading volume has been down through the first quarter of 2012, as volatility remains low and the markets and its participants continue to wait for a clearer view of what’s to come.

According to the Options Industry Council, the asset class has seen a decrease of 6% year-to-date through the first two months of the year. While the numbers may be down from last year, options continue to outperform equities, which is off by nearly 16%.

“There are a lot of things behind that,” said Joseph Mecane, executive vice-president of NYSE Euronext. “I can’t say it will be like this for the foreseeable future though.”

As Mecane notes, the first six months of 2011 were also quite slow, before August came around and there was an explosion of volume. “We’re seeing the other shoe drop now,” said Mecane. “Investor confidence and mutual fund investing is very poor. Until the long term picture improves, we won’t see a sustained increase in volumes until then.”

While trading volumes have declined since the highs of 2008 and 2009, when the markets were in the midst of and the slow road back from the credit crisis, over a longer-term outlook, over the past decade, it has remained steady.

“If you draw a long-term picture, the trading volume is not bad,” said Mecane.

Increasing international interest in the U.S. markets is also expected to boost U.S. trading volume.

“A lot of people are taking more interest in alternative asset classes,” said Eugene Choe, managing director at Credit Suisse. “The growth of the U.S. options market from overseas is just part of the growth in general.”

Choe notes that even in the past 12 months, many institutional clients have come from not knowing what a derivative is, to actively trading them on a daily basis. Equity fatigue and sustained market volatility have driven investors to try new asset classes.

Market volatility sent traders to options in droves in 2011 as a means to hedge risk and protect portfolios. Total U.S. options volume came in at 4.56 billion contracts, up from the 3.9 billion in 2010, a near 17% rise.

Volatility, as indicated by the Chicago Board Options Exchange Volatility Index, has been low all year, hovering in the teens, a far cry from when it had spiked to nearly 50 during the late summer months of 2011.

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