Not All Options Traders Want to Automate Trading - Tabb
July 26, 2010
Hedge fund managers increasingly are using algorithms to control the execution of their orders for options contracts.
But asset managers remain committed to the phone and will, for at least another year, according to a report from the New York consultancy Tabb Group.
The asset managers, Tabb said in a survey released Monday, that asset managers have been reluctant to use automated trading tools that "mostly because of the types of trading they do—mainly writing calls—and the size in which they trade."
These managers deal in "large chunky trades" that are easier to handle over the phone. And since they don't trade in options frequently, they "cannot justify the time needed to learn the nuances of a trading system. According to Tabb's survey, 97 percent will still rely on the phone this year and 96 percent next.
Hedge funds, on the other hand, are trading in higher volume in more complex positions. These firms need algorithms to handle execution of "multiple spread components" and more positions. Where only 9 percent relied on algos last year, 23 percent are using them to oversee execution of options orders this year. Next year: 31 percent, according to Tabb.
Hedge funds "their point and clock DMA activity has stagnated," at about 38 percent of volume, Tabb said.
The continued use of the phone means "paying double or triple the going rate for electronic executions, especially for more liquid options,'' Tabb said. Which means asset managers are likely to move to electronic execution at some point.
"But asset managers still expect to use the phone as their preferred order channel over the next year,'' Tabb said in its report, "U.S. Electronic Options Trading 2010: Algorithms, DMA and Crossing Networks.''
