More than three quarters of surveyed prop trading firms confirmed said volatility trading strategies had out-performed other markets last year, according to a new report from Acuiti.
Of the respondents, 35% labelled volatility “significantly better” than other strategies, while 33% reported a “slightly better” performance.
Around a third of surveyed firms which are not currently trading volatility products confirmed their intention to do so going forward. Furthermore, in terms of levels of interest from clients, 44% of FCMs reported an increase since 2020.
Acuiti’s research – commissioned by MIAX – included responses from senior executives across 94 proprietary trading firms, hedge funds, banks and interdealer brokers, as well as the main futures commission merchants (FCM) that serve the derivatives market.
The report confirmed that volatility trading is gearing up for significant growth, with the sector “moving from a niche asset class to a core strategy for many firms seeking to diversify their strategies”.
Firms are looking to capitalise on the increasingly occurring spikes in volatility, said Acuiti. Ross Lancaster, head of research, addressed innovation in the space, highlighting that there is significant opportunity. He said: “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.”
In terms of optimising liquidity and where traders are looking to trade volatility, the report found that “volume and open interest” was one of the principal considerations when selecting, along with “exchange and clearing fees”, which was cited by the majority of respondents.
Additionally, “incentives offered by exchanges” was highlighted as a crucial factor when trading a new contract for more than half of proprietary trading firms, while hedge funds highlighted both “volume and open interest” and “methodology of index calculation”.
Kaitlin Meyer, vice president of marketing and sales at MIAX, confirmed that demand remains strong for volatility products across futures, options and ETFs and added that “market participants [continue] to look for ways to manage their risk and hedge portfolios even during times of low volatility.”