Increasing focus on risk management and growing use of advanced trading techniques could prompt US futures trading volumes to rise 14% in 2010 following a 23% slump in 2009, according to a new study by research and consulting firm TABB Group.
According to the study, ‘Trends in US Futures Trading: The Buy Side Perspective’, based on 54 interviews with asset managers, commodity trading advisors and hedge funds, the combination of stricter risk controls and across the brokerage industry and the closure of more than 2,000 hedge and proprietary trading funds prompted US futures trading volumes to drop in 2009 for the first time since 1995.
However, the traders interviewed told TABB they have a new view of risk and reward, which bodes well for
futures trading volumes in 2010.
“True, the bad news is that volume’s down, but there is plenty of good news ahead. Trading activity is beginning to stabilise, with pockets of strength in core asset classes such as energy, commodities and foreign exchange beginning to accelerate,” said Andy Nybo, principal and head of derivatives at TABB and author of the study, in a statement. “As trading volume returns, rising open interest indicates that participants are using futures for ‘longer term’ risk management and commercial strategies.”
Nybo expects futures will continue to grow in importance as a tool for managing risks and increasing exposure in the desired areas. “The events of the past year are clearly focusing attention on the use of futures as a way to better manage exposures across a broad range of asset classes,” he said.
The study also expects the use of technology in futures trading to have a significant influence on the market structure. “As more trading is facilitated through direct market access, FIX-based trading schema and the increased adoption of execution algorithms, futures markets will increasingly become dominated by automated trading strategies,” said Nybo. “Trading will accelerate, and technology will become a prerequisite for actively trading in the futures market.”
High-frequency trading strategies are destined to play a greater role in futures. While the market structure has impeded low-latency strategies to an extent, Nybo expects exchange competition, fragmentation and fungibility to spawn a new class of futures traders.
He also believes regulatory scrutiny of OTC derivatives will give the industry additional momentum. “The increased regulatory focus on OTC instruments will eventually become an all-out stimulus package for the listed-derivatives industry, and the futures market stands to benefit greatly, as strategies that have historically used OTC instruments shift to the more transparent, listed futures marketplace,” he said.