On Monday, TABB Group reported?new research findings that revealed equity options market makers are re-examining their business models thanks to declining volumes, stagnating volatility and rising technology expenses; this has created a business environment that favors larger firms with technology capable of scaling.
From its latest research, “US Options Market Making 2013: Scale, Scope and Survival,” written by TABB Group’s Andy Nybo, a principal and head of derivatives, it disclosed that the structural shifts in the US equity options markets are forcing these firms to continuallly invest in technology to support the complexity from providing liquidity across a fragmented exchange landscape.
Those who cannot invest will likely undergo limited growth prospects in all but the narrowest of niches.
For the large market-making firms, they spend an annual average of $28.8 million for ?technology to support options market making; this compares to small firms spending a $2.9 million average.
Nybo said, “US options market making has become a cutthroat business.” He noted that firms are reviewing their ability to survive as they deal with rising technology costs to support their activities where minimizing latency has become a key to success.
Factor in competition from high-frequency trading firms and this is forcing market makers to invest a large amount resources in IT systems to support faster trading protocols.
From this, market makers intend to use automated, high-frequency trading systems for 94% of their total activity this year, said Nybo.?
This information comes from TABB Group interviews of 26 options market makers that operate on one or more of the existing 11 US options exchanges. They account for an approximate 45% of total industry volume.
The new 34-report encompasses the following:
- Products offering the most attractive growth opportunities, from complex orders to extended hours trading
- Biggest challenges facing equity options market makers
- Biggest regulatory headaches
- The challenges of low volatility
- Optimal number of options exchanges
- Activity executed through black-box strategies, phone and point-and-click, 2011-2013
- Technology spending to support options market-making businesses
- Ranking of IT challenges
- Initiatives undertaken post-Knight incident
- Importance of access to order flow
- Best exchange model to create liquidity
- Value of a trade reporting facility