tabb presentation 9.17.13 public

September 17, 2013

US Options Trading 2013:Looking for the Edge

Andy NyboPrincipal, Head of Derivatives

TABB Group

Proprietary and Confidential

Agenda

Introduction and methodology Market conditions and strategies Liquidity challenges Technological necessity Broker services Key takeaways

2


52 firms interviewed for the 2013 report 22 asset managers 26 hedge funds 4 prop trading firms

Total AuM of $6.8 trillion AM - $6.7 trillion HF - $50.6 billion Prop - $2.5 billion

Average daily trading volume for the sample totaled 644.6K contracts AM – 64.2K HF – 472.4K Prop – 108.1K

43%

49%

8%

Asset Managers Hedge Funds Prop

MethodologyParticipant Segmentation

$6.8 Trillion AUM

Population by Type 99.2%

.7%

.1%

3


311,561,541 262,434,225

351,004,878

405,860,027

309,262,866 283,487,110

342,006,211 341,207,420 378,480,506

417,188,575

335,425,947 372,928,893

348,218,171

550,049,407

391,246,939 344,377,310

320,324,954 319,640,606

377,539,997

325,813,094 306,817,994 329,627,631 335,527,473

361,071,621 311,565,300

371,147,433 386,428,255 361,180,257

Monthly Options Trading VolumeJan-10 to Jun-13

Source: OCC, TABB Group estimates

2010

2011

2012

2013

P

3,899

4,563

4,003 4,224

Annual Volume

Note: All amounts in millions of contracts

Options volume estimates: 2010 to 2013P

5.5%-12.5%

US listed option volumes are flat year-to-date with volume projected to increase marginally in 2013

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Proprietary and ConfidentialDec

-90

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Dec-95

Dec-96

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Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

0

10

20

30

40

50

60

70

80

90

2012 – 2013 Closing LowMarch 15, 2013 – 11.3

2012 – 2013 Closing HighJune 1, 2012 - 26.7

Jan-12 Dec-12 June-13

Benign volatility is causing the buy side to refine strategies and adjust expectations to a new normal

Source: CBOE, TABB Group 5


Yes68%

No32%

Have you adapted your strategy due to lower volatility?

How?

Manage ex-posure better

Lower volumes

Bigger Positions

Writing tighter strikes

Adjust expecta-tions

More precise focus

Replication

Spreads

Less vol selling

React faster

Less overwriting

32%

24%

21%

18%

15%

9%

9%

9%

6%

6%

6%

Traders are becoming more precise in their options strategies as they look to capture declining levels of edge

Source: TABB Group 6


Less liquidity

More liquidity

More electronic trading

Tiered liquidity

Lower dealer capital

Lower margins

Weeklys

New products

17%

33%

17%

17%

11%

22%

11%

48%

13%

22%

26%

17%

13%

9%

13%

Hedge funds Asset managers

What has changed the most in options markets?

The sell side is tiering liquidity, creating challenges for aggressive trading strategies requiring capital



Proportion of Volume Traded by Symbol

2007 2008 2009 2010 2011 2012 2013:H2

30% 35% 36% 36% 40% 39% 41%

21%22% 21% 22%

22% 22% 21%12%

10% 11% 11%10% 11% 10%

25%24% 23% 22% 20% 21% 20%

12% 9% 9% 9% 8% 7% 7%

Top 10 names 11 to 50 51 to 100 101 to 500 501 and above

72% of all

volume is in top

100 names

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Liquidity is becoming concentrated in the top 100 names with tighter markets and less available edge the result

Source: OCC, TABB Group


20132012

50%

11%

Asset managers

20132012

65%

58%

Do you use weeklys in your strategies?

Hedge funds

The buy side is increasingly using weeklys in strategies as liquidity builds and product availability expands



0

10

20

30

40

50

60

70

80

90

100

0%

5%

10%

15%

20%

1%

4%3%

6%

3%

6%7%

5%

9%

6%

11%

8%

12%

8%

10%11%

12%

14%15%

12%

16%

14%

16%

14%

18%

20%

15%

19%

22%

Weeklys Volume (Left Axis) % of total volume (right axis)

Volume in millions of contracts

Liquidity will continue to build with volumes expected to reach 25% of total volume over time

Source: OCC, TABB Group 10


Technological necessity


What projects?

Back office

Analytics

Entire infrastructure

New ETS

Spread trading capability

Broker neutral ETS

OTC pricing

Low latency platform

29%

29%

14%

14%

14%

33%

11%

22%

11%

11%

11%

11%

Hedge Funds Asset Managers

New technology projects are on hiatus; current priorities are targeted at efficiencies across the trading process


Yes39%

No61%

Have you implemented any new technology projects for options trading?


Electroni

c36%

Voice

64%

Electroni

c97%

Voice

3%

Electronic markets, market complexity and tiered liquidity are driving the use of automated trading tools

Buy side accounts Market Making Firms

What trading channels do you use for options (2012)?



Higher volumes

Screen liquidity

Commission savings

50%

25%

25%

29%

43%

29%

Hedge funds Asset managers

What would influence you to use more low touch order channels?

Future gains in electronic trading will come from higher volumes and efforts to reduce trading costs



Broker Fighting for Market Share

Broker services


How would you rank your top broker in the following service areas?

Research qual-ity

Market colorCommission rates

Back office support

Availability of capital

Execution expertise

Trust to work an order

3.7 3.8 3.6

3.8 4.1 4.1 4.2

3.74.04.1

4.34.54.54.7

Second place broker Top broker

Trust, execution and access to capital drive the broker selection process



Asset managers

Hedge funds

29%

56%

52%

21%

7%

7%

4%

7%

5%

5%

3%

4%

Execution Capital Research Relationship Technology Back office

How would you allocate $1 of commission spend?

The value of commission spend differs depending on strategy and type of order flow



Key Takeaways


Key takeaways The benign volatility environment is forcing buy side traders to

chase edge Traders are refining strategies as lower volatility reduces opportunity Traders are exploring new products and asset types

Tiered liquidity is challenging buy side traders Liquidity is concentrated in top 100 names causing tighter markets and

reduced edge Brokers are becoming more judicious when allocating capital

Low touch channels are important for more liquid options Use of DMA, complex orders and algos is critical in more liquid options The complexity of strategies is also driving technology adoption

High touch, full service brokers are essential but lower commissions are forcing brokers to rationalize service offerings Competition from electronic execution and agency brokers is pressuring

commission levels Full service brokers still dominate due to the need for capital and support

for larger and more complex trades18


2013 Derivatives Research Calendar Fourth Quarter 2013 Research Calendar

European Demand for US Listed Options Factors Influencing the Use of Options by US Mutual Funds US FCM Business 2013 The Value of Retail Options Order Flow

2013 Published Research US Options Trading 2013: Looking for the Edge US Options market Making 2013: Scale Scope and Survival Cross Listing: The Tension of Cooperation OTC Equity Derivatives: Harnessing the Liquidity US Futures Market: State of the Industry 2013 Monthly Options Liquidity Matrix

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tabb presentation 9.17.13 public

Economy & Finance