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European Demand for U.S. Equity Options Remains Strong

Traders Magazine Online News, June 13, 2018

John D'Antona Jr.

The Options Industry Council (OIC), an industry resource funded and managed by OCC, the world’s largest equity derivatives clearing organization, announced the results of the study, European Demand for U.S. Exchange-Listed Equity Options 2018, conducted by Burton-Taylor International Consulting and commissioned by OIC. 

The Burton-Taylor study found that European investors account for approximately nine percent of total U.S. exchange-listed equity option order flow and that the magnitude of their U.S. equity holdings has increased 52 percent since 2013 to a total of $461 billion in 2017, continuing to drive the demand for risk management strategies for portfolio protection. Additionally, European investors focus on income generation, capital appreciation and volatility strategies. Hedge funds comprised the largest category of European users, accounting for an estimated 53 percent of total European order flow. Private wealth management accounted for 21 percent, proprietary trading firms accounted for 12 percent, and investment managers eight percent.

Even though low volatility has impacted trading by high volume trading accounts including hedge funds and proprietary trading firms, the study found the broad range of U.S. exchange-listed equity options are appealing to hedge funds seeking liquidity and private wealth accounts seeking to hedge or generate income. There is also significant opportunity for retail investors to increase their usage of U.S. exchange -listed equity options, especially for the most actively traded options, including popular technology stocks and ETFs on major U.S. indexes. U.S. exchange-listed equity options are attractive to European investors because of their ease of execution, screen liquidity, price transparency, trading hours and they are centrally cleared through OCC, reducing counterparty risk.

The study findings showed European investors saw the most potential in short-term U.S. exchange-listed options (42 percent), ETF options (42 percent) and single stock options (33 percent). The challenges that European investors reported facing included regulation and understanding how the U.S. exchange-listed equity options market is structured. European investors also cited the importance of option education.  

The study also highlighted specific trends in the overall U.S. exchange-listed equity options market. Weekly expirations accounted for 28 percent of total volume in 2017, representing a 5-year compound annual growth rate (CAGR) of 17.9 percent. ETF options continued to grow, reflecting the interest in passive investment strategies and exposure to targeted segments, and accounted for 38 percent of total trading. Seven of the top 10 most active U.S. exchange-listed equity options represented ETF or broad market indexes. ETF options have shown a 14.8 percent CAGR 2006-2017, compared to 9.5 percent for index options and 3.1 percent for single stock options.

“European investors are clearly focused on U.S. exchange-listed equity options, as these markets provide investors with the deep liquidity and product diversity to support their U.S. focused strategies,” said Andy Nybo, Director at Burton-Taylor International Consulting. “The range of available products provides considerable flexibility for a broad variety of income and risk management strategies, with rising demand from institutional and retail investors supporting future growth.”

“The Burton-Taylor study on European demand for U.S. exchange-listed equity options, which builds upon previous studies done in 2014 and 2011, provides OIC with invaluable insights as we look to develop and grow our educational initiatives,” said Gary Delany, Director of European Education for OIC.  

Burton-Taylor conducted 36 interviews with U.S. and European market participants from 31 different firms that provide services for U.S. listed equity options trading. The anonymous interviews, including 13 firms located in the U.S. and 18 firms located in the U.K. or continental Europe, were conducted during the first quarter of 2018 and focused on the changing perceptions of market participants since 2014.

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