Tag Archives: TABB Group


Bank Trading Desks Merge Bonds and ETFs

Corporate Bonds and exchange-traded funds is a combination that first seemed counter-intuitive to the select universe of traders who are actually fluent in both corporate bond trading and equity trading; two practice areas that are distinctively different. “Stocks are bought and bonds are sold” as they used to say, and the nuances of trading these distinctive asset classes in the secondary marketplace have long been at odds with each other.

This explains why fixed income traders from both the buy-side and sell-side rarely even knew their equity-trading counterparts, no less engaged in cross-asset trading. But thanks to shrinking trading profit margins, Wall Street trading desks now ‘get the joke’, and per story below, are bolstering their business models.

(REUTERS) Feb 18 Wall Street banks are ramping up businesses that trade exchange-traded funds full of bonds, a bright spot of growth at an otherwise bleak time for trading but one that may carry unappreciated risk.

Barclays PLC, Credit Suisse Group AG and Goldman Sachs Group Inc have all created special teams to make markets in bond ETFs. The teams include staff across stock and bond markets, since the ETFs trade like stocks on stock exchanges, but their underlying securities are bonds.

All told, 12 to 15 banks now have a presence in the business, whereas a few years ago almost none did, said Anthony Perrotta, global head of research and consulting at TABB Group.

“There are a lot of institutions that, even though they might be retrenching in fixed-income trading, are looking at ETFs as a way to galvanize their business,” said Martin Small, who oversees U.S. operations for BlackRock Inc’s iShares unit, which is the largest ETF issuer.

Although these businesses are sprouting up across Wall Street, they are unlikely to make up for huge profits banks earned during the glory days of bond trading, at least not anytime soon.

Investors pay banks 0.01 percent to 0.03 percent to trade a bond ETF, according to TABB Group, compared with 1.03 percent for an individual bond. Traders say they are hoping to make up for piddling margins by selling more of the product, since the ETF business is a bulk-volume one that is rapidly growing.

The sales push comes after years of pressure from leading ETF creators like BlackRock and State Street Corp to make markets for the bond ETFs. Those firms rake in billions of dollars’ worth of revenue from ETFs each year, and view bond ETFs as a way to grow their own businesses.

Firms that create ETFs need banks to act as intermediaries for sales, and also to ensure that prices are in sync with underlying securities. Before banks entered the market, trades were handled by market-makers like KCG Holdings Inc, Cantor Fitzgerald and Susquehanna Capital Group, who have been in the business for years.

As Wall Street has warmed to bond ETFs, the market has quickly grown. Assets under management in the U.S. rose 44 percent to $372 billion at the end of January from $258 billion a year earlier, according to fund research service Lipper. That represents about 19 percent of the broader $2 trillion U.S. ETF market.

While the bond-ETF boom may be good for Wall Street, it is not without risk.

It comes at a time when liquidity in the corporate bond market has shriveled due to new rules that require banks to hold a lot of capital against those securities. As a result, banks avoid buying bonds from investors unless they can resell them quickly, and do not maintain much inventory for interested buyers.

Despite their holdings, bond ETFs trade more like stocks, on stock exchanges, so they are not facing the same type of liquidity issue. But it is unclear how they will perform if investors rush for the exit all at once, or if markets come under serious stress. During the Aug. 24 “flash crash,” for instance, some ETFs failed to trade properly.

The full story from Reuters is here

Investors Use of Corporate Bond ETFs On The Rise

MarketsMuse.com blog update courtesy of press release from Tabb Group and profiles new research report focused on institutional investors’ growing use of corporate bond ETFs.

NEW YORK & LONDON–(BUSINESS WIRE)–In new research examining accelerating growth in the corporate bond exchange-traded fund (ETF) market, which has seen assets under management (AuM) rise more than $90 billion from 2009 to 2014, a nine-fold increase in aggregate and an annual 42% compound growth rate, TABB Group says bond ETFs can help institutional investors manage investment flows, enhance returns and limit transaction costs in the current liquidity environment.

“This is a way to achieve market beta while the single-name search process carries on.”

Regulatory burdens of the Volcker Rule, Basel III and the Liquidity Coverage Ratio (LCR) have handicapped large banks and altered their secondary market-making businesses, forcing them to change the manner in which they provide liquidity to investors, wreaking havoc on the process of building and expanding portfolios. Institutional investors navigating this new landscape need to leverage every tool available, say Anthony Perrotta, a TABB principal, head of fixed income research and research analyst Colby Jenkins, co-authors of “Bond Market Entropy: Bringing Order to the Cash Bond Crisis,” which is why they have been embracing the corporate bond market.

“Bid/ask spreads for large bond ETFs are substantially more stable than their underlying cash bonds,” says Perrotta. They’re also being used as a means of exchanging credit risk during times of stress in the underlying market.”

According to Jenkins, “A 5-10% liquidity sleeve in corporate bond ETFs that tracks to a diversified portfolio of bonds is becoming a popular tool among asset managers to efficiently manage their investment flows.” In the past two years, he says, large single-name portfolio managers have begun utilizing ETFs as a means to smooth out their exposure during redemption periods. Alternatively, they are using ETFs to gain interim exposure to the market when receiving an investment inflow from a client such as a pension fund, insurance company or other long-term oriented investor. Instead of waiting some elongated period of time to find the appropriate cash bonds, they turn to ETF shares that correspond to their core portfolio. “This is a way to achieve market beta while the single-name search process carries on.”

Although 60% of the corporate bond notional trading activity in the second half of 2014 took place in just 8% of the CUSIPs traded, there are more than 260 bond ETFs available to investors today, up from 62 in 2008, a 326% increase. And despite regulatory approval and entrenched pre-ETF investment mandates being the two greatest barriers currently to institutional corporate bond ETF adoption, “a larger pool of National Association of Insurance Commissioners (NAIC) credit-rated bond ETFs that have unique economic advantages over non-rated bond ETFs, such as more lenient risk-based capital requirements, will be a key stepping stone to the next threshold of institutional adoption,” Perrotta says.

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Dark Trading Pools: Deconstructing Market Structure?

MarketMuse update courtesy of Anna Bernasek 9 January article in The New York Times.

JUDGING solely by the name, stock trading in so-called dark pools may conjure up images of mysterious deals cut beyond public view. Also called simply “dark trading,” it happens when computers serve as matchmakers and bid-and-ask quotations aren’t displayed to all participants. What’s surprising is just how big the dark-trading market has become.

trading in dark 1In the third quarter of 2014, the average daily volume of dark shares was 2.56 billion, accounting for 45 percent of the total average daily share volume in the United States, according to a report from the TABB Group, a financial research and advisory firm. That is up from 42 percent during the same period in 2013, according to the report.

What’s behind the growth? “The proliferation of dark volume is partly because of technological advancement and the creation of multiple trading venues,” said Sayena Mostowfi, senior analyst for equities at the TABB Group and author of the report. “The thinking is if you have the match internally, why would you go to the exchange?”

Assessing the overall impact of dark trading isn’t simple. Connecting computers with other computers might simply seem to be the height of efficiency, and no doubt it has some advantages. But while dark trading can benefit some insiders, it may cost the market as a whole.

For one thing, dark trading has led to greater fragmentation of the domestic stock market, which is now made up of around 300 venues. Only 13 of these are registered exchanges, while the rest are alternative trading systems or broker-dealer platforms, according to a recent paper by Frank Hatheway, chief economist for Nasdaq; Amy Kwan, now a lecturer in finance at the University of Sydney Business School in Australia; and Hui Zheng, a senior lecturer at the same school. This fragmentation has made it more difficult for many traders to find the best prices.

The paper concluded that, on balance, dark trading turns out to raise aggregate transaction costs and reduce the accuracy of prices displayed in traditional trading venues. The paper’s findings would seem to suggest that the more dark trading grows, the less meaningful public stock quotes are. And that possibility is something that all investors should be concerned about.

For the original article from The New York Times, click here


Equities Options Marts Bustling: 1 Billion Contracts Trade in Q3

tradersmag  Trading in equities options is enjoying a resurgence, thanks to recent volatility in underlying cash markets, a burst in IPO activity and heightened hedging action in the stocks of companies such as Apple, Inc. according to reporting by TradersMag. Citing a TABB Group recent study, 0ptions mart trading volume exceeded 1 billion contracts in Q3. The third quarter gains represent a 4.9% increase from the second quarter total and an 8.2% increase from the year-earlier period.

options volumeIn its latest research, “U.S. Options Market Review: Third Quarter 2014,” Tabb Group also reported that U.S. options volume rebound was driven in part by a 15.8% jump in September’s total as retail fervor around Apple’s new product announcements, the Alibaba IPO and rising volatility brought monthly volume to 365.9 million contracts.

The report, compiled and written by TABB Group principal Andy Nybo, head of derivatives research, also noted that volatility spikes in late July and late September helped push volatility averages up in each month, with the CBOE index averaging 13.5 in both August and September – prompting more trading.

Weeklies trading, Nybo noted, remained strong in the third quarter with volume totaling 270 million contracts, up 7% from the second quarter total and 39% from the year-earlier period.

Noted Matt Gohd, market strategist at WallachBeth Capital, “Aside from volume spikes that typically come with increased volatility, I think there is clearly an increasing trend towards using equity option strategies for opportunistic, alpha capture and hedging purposes on the part of sophisticated investors as well as institutional fund managers.” Added Gohd, “The better news is that an increasing number of fiduciaries recognize that equity option strategies can play a crucial part of their overall approach to managing risk in a responsible way.”

Buy-Side Trading Desks: Eye On Electronic Capabilities

tradersmag   Extract courtesy of TradersMagazine / Phil Albinus

Although the buyside has been known for its cautious and conservative approach to change and adapting to new market conditions, those days may be over. According to a new study by market research firm Tabb Group, the rate of change within the US buy-side equity trading desk is accelerating even though commissions have declined 19 percent since 2010.

In the first of three new reports entitled US Institutional Equity Trading 2014: Bellwethers of the Buy Side, partner and director of research Adam Sussman, senior analyst Sayena Mostowfi, and research analyst Valerie Bogard interviewed 108 asset managers in the U.S. Along with identifying firms that are on the IT leading edge, they found “a middle majority of firms who recognize the threats of being behind and are actively engaged in bringing similar capabilities to their firm.”

Last year saw the biggest increase in electronic trading, up to 41 percent of shares traded with bellwether firms auto-routing program trades and parent orders with share sizes of less than 5 percent of average daily volume (ADV). But as more of these firms sought to automate pieces of their order flow, the asset managers told TABB a quantitative overlay was critical. “This issue came up repeatedly in different forms, from portfolio manager alpha modeling, to venue analysis and internal routing optimization,” said Sussman.  

Among some of Tabb Group’s findings are: KEEP READING VIA TRADERS MAGAZINE

Proposed #Tax on #Options Strategies: Lawmakers Going Looney?

tabb forum logoCourtesy of Andy Nybo and TABB Forum

A proposal to reform the taxation of financial instruments would dramatically change the tax treatment for options strategies, potentially decimating trading volumes by as much as 40%. And it is not the so-called ‘fat cats’ of Wall Street that will be impacted by the proposal; instead, the biggest impact will be felt by asset managers and Mom and Pop investors.

The US listed options market is under attack. And if Washington politicians have their way, it is destined to become a mere shadow of its current form, with far-reaching implications for the financial industry and end users such as retail and institutional investors.

The danger lies in a proposal put forth by Representative David Camp (R-Mich.), Chairman of the House Ways and Means Committee, that contains a number of provisions intended to reform the taxation of financial instruments. Of particular interest to options market participants are proposals that dramatically change the tax treatment for strategies incorporating the use of options that have been a mainstay of the business since its inception in 1973.

The proposal will potentially decimate trading volumes, with total industry volumes seeing a decline of as much as 40% if the proposal is implemented in its current form. And it is not the so-called “fat cats” of Wall Street that will be impacted by the proposal. It is also not targeted at toxic flow that is perceived as having a discernible edge over other investors.

The Camp proposal impacts both retail and institutional demand for options. The biggest impact will be felt by asset managers and Mom and Pop investors that are increasingly using options to earn premium income and manage price risk in their equity holdings. TABB Group estimates that in 2012 retail investors accounted for 14% of total US options volume, with traditional asset managers and hedge funds accounting for an additional 38% of the total. It is volume from these two segments that will be impacted the most by the new tax scheme and, given their critical role in the options market, any tax law changes impacting demand from these two segments needs to be closely analyzed.

Rep. Camp’s proposal may be well-intended, but it is the unintended consequences that will decimate the options market. Surprisingly, it is not exotic options strategies designed to avoid taxes that are the focal point of the reform. Instead, the proposal targets plain vanilla listed options strategies used by main street investors that have begun to embrace options as a way to earn income or to hedge equity ownership. Continue reading

Options Market Poised For Pick-Up; Institutional Managers Re-Focus Risk Strategies for 2013

tabb forum logoThe Outlook for 2013

Uncertainty around the elections, low volatility and anemic volumes in the equity markets drove the first year-over-year decline in options trading volume since 2002. But bright spots such as weekly and mini options portend a stronger 2013.

Despite the options market doldrums in 2012, TABB Group believes the volume retreat is a temporary phenomenon, especially when compared to trading activity in the “abnormal” market environment of 2011. The use of US-listed options by institutional investors remains in its infancy, and their adoption will only expand in the future. Latent demand from institutional investors that are just beginning to explore the role of equity options as a part of their portfolio strategies will drive volume in 2013 and beyond.

Weekly options will continue to expand their footprint in 2013 , and the pending March launch of mini options is also expected to drive volumes into 2013, especially from smaller retail accounts that have been largely absent from the options market in recent years. After initially launching for a handful of high-priced stocks, exchanges can be expected to quickly expand the list of names in the program. Trading interest from retail accounts will attract the interest of institutional accounts, especially accounts using relative value and quantitative strategies.

To read the full article from TABB Group, please click here