Volatility and Data Demands Driving Options Tech
Securities Industry News, Jan. 5, 2009
By Alexa Jaworski - Volatile market conditions rattled Wall Street throughout 2008, but for providers of options-focused technology it has been a boon.
"Volatility in and of itself isn't going to cause technology spending--it's the derivatives of volatility," explains Robert Newhouse, CEO of Ballista Securities, which operates a block trading platform for equity options that went live in November. One result of increased volatility, notes Newhouse, is a corresponding jump in market data, a major area of focus for the "technology portion of the options world."
Last year's explosion in volatility led to a "massive need" among options firms for up-to-date, live pricing on their investments or potential investments, says Paul Zubulake, senior analyst at Boston-based Aite Group. "You need the volatility capability."
Through November, trading volumes stood at 3.4 billion contracts, according to Options Clearing Corp. (OCC), compared to 2.6 billion over the same period in 2007. And while daily trading averages in November and December were down from the year-to-date average of 14.2 million, OCC estimates that total volume in 2008 will finish 25 percent higher than the year before.
Michael Barrett Stern, co-founder and chief strategy officer of Derivix Corp. in New York, a supplier of options pricing, risk visualization and analytics software, points to a heightened awareness of risk. "When you take a look at the fluctuations both in pricing and volatility throughout the day, what you're seeing is rapidly changing marketplaces," he says. "I think it's an issue of survival for a lot of our customers to be able to have risk visualization in real time."
In November, Chicago-based Activ Financial announced it had integrated its direct feed ticker plant with the Derivix platform. In a jointly issued statement, the companies noted that as options volumes continue to soar, "modern market data technologies are more critical than ever."
"All firms have a challenge processing that much data," says Shawn Kaplan, business development manager at Activ, "let alone trying to do real-time analytics on that data." The combined solution "essentially calculates implied volatilities, and that's been very well accepted-it fills a particularly interesting niche."
Options Bandwagon
Trading firms and systems vendors that had been solely focused on equities are now turning to options, notes Kaplan, who added that more than half of his company's clients are in the options space. An asset class expansion is occurring, he says, "with equity shops offering equity options and futures. And you find a dramatic global push as well."
David Hait, founder and president of OptionMetrics, a New York-based company that offers options pricing data and analytics, says that "people are slowly and continually realizing that options and volatility are important and that there are more opportunities in both of these ways of looking at the market." OptionMetrics, he says, has seen considerable growth from hedge funds and institutional investors. "A lot of the institutions have expanded the business they are offering their customers and they need analytic tools in place to support that," he adds.
The turbulent markets are going to bring in new participants, says Aite's Zubulake, including "people who never even looked at equity options."
It's not just the traditional options traders making demands on systems, says Derivix's Stern. As a relatively new vendor, three-year-old Derivix gets "a lot of phone calls from people who are starting new options desks," he notes.
"This is seen as a source of new opportunity," says Stern. "It's easier to still find edge and opportunity within the options market. Options are coming into their own as being a great instrument for doing exactly what they were created for--providing natural hedges and ways to explicitly manage risk and ... a direct vehicle for trading volatility as a class. All of these things taken together mean that there will be lot of new business coming into options."
About Derivix:
Derivix is a financial services software company providing options pricing, risk visualization, and analytics solutions to the industry's leading options traders, sales traders, and hedge funds. Derivix sets the new standard in analytics systems, offering customers the powerful tools they need to stay ahead in a rapidly evolving electronic marketplace. With a commitment to broker neutrality, Derivix provides customers the flexibility they need to fit solutions into any business structure. Founded in 2005, the company has offices in New York, Boston and Silicon Valley.
This release does not constitute an offer to sell or a solicitation of an offer to sell any securities of Derivix.