There is “significant appetite” for volatility products across the derivatives markets as firms seek to hedge risk and capitalise on spikes in volatility, an Acuiti study has found.
Expanding Horizons in Volatility Trading, which was produced in association with MIAX, found that 44% of FCMs surveyed reported increased demand from their client base for trading volatility since 2020.
Acuiti’s head of research Ross Lancaster said: “There is significant room for innovation in volatility markets. Different products with different methodologies will enable firms to trade across different measures of volatility, expanding the strategies used and creating basis and arbitrage trading opportunities.”
Two thirds of respondents said the performance of their volatility trading was slightly or significantly better compared to their other strategies.
Increased demand from clients has led to strong demand from firms that trade volatility to expand the overall ecosystem with new products that could be traded alongside established products as well as reduce trading costs and improve execution, such as smaller tick sizes for futures and options.
MIAX vice president of marketing and sales Kaitlin Mayer said: “Demand for volatility products across futures, options and ETFs remains strong, with market participants continuing to look for ways to manage their risk and hedge portfolios even during times of low volatility.”
The report suggested volatility traders are looking to exchanges to bring these new concepts to the market, with index methodology seen as a key consideration for any firm looking to adopt a new product. Volumes and open interest was also a key consideration, as well as market making/incentives offered by the exchange.
Additionally, the increasing popularity of short-dated options trading is a trend that could have a major impact on market participants’ expectations both for listed volatility products and how they are calculated.
Acuiti surveyed 94 proprietary trading firms, hedge funds, banks and interdealer brokers as well as the main FCMs that serve the derivatives market.
©Markets Media Europe 2023
