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July 19, 2023 - Demand for volatility products is growing across the derivatives markets as firms seek to hedge risk and capitalise on the spikes in volatility that have become a feature of equity markets since 2020, an Acuiti study has found.
The report, 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.
For the report, Acuiti surveyed 94 proprietary trading firms, hedge funds, banks and interdealer brokers as well as the main FCMs that serve the derivatives market.
The study found strong demand from firms that trade volatility to expand the overall ecosystem with new products that could be traded alongside established products.
In addition, market participants that took part in the study showed a common desire for new products that would reduce trading costs and improve execution such as smaller tick sizes for futures and options.
Volatility traders are looking to exchanges to innovate to bring new concepts to the market, with methodology seen as a key consideration for any firm looking to adopt a new product.
The key findings in the report include:
• There is significant appetite in the volatility trading community for new derivatives contracts.
• Volatility trading is set for significant growth as more firms plan to adopt the asset class and trade new products alongside existing ones.
• Index methodology is very important to most market participants and will be a key component in any new contract’s success.
• The rise in 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.
“There is significant room for innovation in volatility markets,” says Ross Lancaster, head of research at Acuiti. “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. In addition, different types of market participant will find different use cases for the various methodologies, growing the overall ecosystem for volatility trading.”
“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,” said Kaitlin Meyer, VP of Marketing and Sales at MIAX. “SPIKES Volatility Products offer traders another choice when trading volatility, providing a more robust methodology and lower exchange fees to support their strategies.”
To download the full report visit https://www.acuiti.io/expanding-horizons-in-volatility-trading
