Tag Archives: marketsmedia.com

Instl Options Trading Liquidity Reined In By Regulatory Rules and Leverage Ratios

MarketsMuse.com Strike Price update strikes at the heart of how the financial industry’s new regulatory regime is impacting liquidity across the institutional options market, courtesy of 09 April coverage by MarketsMedia.com.

marketsmedia logo april 15Regulatory requirements that dealers keep more capital on their balance sheets is squeezing options liquidity for institutional traders, who buy and sell the equity derivatives to generate alpha and hedge long- and short-term exposures in their portfolios.

“The regulatory environment is affecting liquidity and pricing for investors in option markets,” said John Burrello, senior trader at Invesco. “Basel III, Volcker, and Dodd-Frank have made broker-dealer balance sheet capacity more expensive – and that is being passed onto investors through wider bid/ask spreads and less capital commitment.”

The introduction of the leverage ratio – which has a target ratio of 3.0% under Basel III – is a hallmark risk-based capital requirement. Starting in 2015, banks will be required to disclose the leverage ratio, with a view to migrating it to a Pillar 1 requirement by 2018 after a final calibration

Basel III will have a significant impact on banks and force changes in the way trading and prime brokerage desks operate. Although these measures are aimed at the banking sector specifically, repercussions will be felt throughout the network of market and counterparty relationships which make up the global financial system.

This is especially true for investors looking to hedge longer-term exposures, “because dealers have to tie up that risk on their balance sheets,” said Burrello. “It has also affected even short-term tail hedging, because dealer stress-tests account for potential capital needed to take the other side of downside tail events.”

At the same time, custodians and prime brokers have started asking clients to hedge tail risk more aggressively in order to avoid increased collateral requirements. “As in other markets, like treasuries and credit, equity options could potentially become less liquid as a result of decreased broker-dealer balance sheet capacity,” Burrello said.

For the entire story from MarketsMedia.com, please click here

2015 Buy Side Trader Resolutions:Be More Targeted When Using Sell-Side Executioners; These Experts Would Know

MarketsMuse update courtesy of extracts from 31 December story in industry mag Markets Media.com

marketsmedia logoThe buy side is becoming more targeted with sell-side firms, employing a rifle rather than a shotgun approach as liquidity continues to shrink. A big factor behind this newfound independence has been the lessening of liquidity in 2014 in derivatives and fixed income markets, which has forced buy-side institutions to be more resourceful in sourcing liquidity

“The buy-side is more empowered and understandably, taking greater ownership of their execution and process,” Jennica Ross, managing director at execution firm WallachBeth Capital, told Markets Media. “Within those segments they are obviously narrowing the relationships that they have. They don’t need to have the plethora and the sheer numbers of external sell-side relationships that they had before, and the relationships they do have are now much more consultative.”

“The most surprising thing was how many market making firms basically closed up,” said Dave Beth, president and chief operating officer at WallachBeth. “The lessening of liquidity throughout the whole derivative landscape, both listed and the OTC, we see happening at a broad stroke. Clients should expect [spreads] in derivative markets to widen a little bit. I think it has a lot to do with regulation and with balance sheet usage in the bigger institutions.”

In WallachBeth’s ETF market making business, liquidity remains at high levels. “As far as the ETF cash business, one could say the liquidity is as great as ever and it continues to grow,” Beth said. “Whereas in the listed and OTC options space, there’s been an express decrease in immediately actionable liquidity. I think that it’s affected us no different than any other player. I think clients also recognize that the playing field is changing, and that it’s okay to pay a little bit of a wider spread to get their business done.”

WallachBeth continues to diversify its business in order to take up the slack left by the exit of larger sell-side institutions.

“While there’s been contraction of liquidity within the derivatives space, we’ve seen an increased opportunity from more clients who are getting involved in our other business units, whether that be equity, program trading or fixed income trading,” said Ross.

For the full story from Markets Media, please click here.