Trading of futures options is growing rapidly and has widely been viewed as a market primed for expansion. While somewhat nascent compared to equity and index options markets, the Tabb Group expects futures options activity to grow strongly as financial market participants increasingly use these products as part of their investment and hedging strategies. Factors such as changing interest rate policies, the increased electronification of options, technology advancements and underlying futures becoming more attractive to investors are all having an impact.
Post-financial crisis, we’ve seen the popularity of options on futures grow across all asset classes at CME Group. In April, we experienced significant growth in options as open interest jumped to more than 51.6 million contracts, up 21 percent year over year. Average daily volume in options across asset classes was nearly 2.3 million contracts, with more than 52 percent of those options trading electronically. During the first quarter, options daily volume averaged 2.8 million contracts, which is a 12 percent increase over last year.
CME Direct and the Growth of Electronic Options
The growth in electronic trading of futures options can be attributed to a few different factors, but without a doubt advancements in trading technology and functionality have played a key role. CME Direct, which provides access to CME Group electronic futures, options and OTC markets, across asset classes, on a single platform, provides immense value to brokers including easier compliance with regulation, increased block entry efficiency and reduced errors.
The launch and adoption of CME Direct across a global footprint of more than 4,000 end users has allowed us to provide enhanced options functionality for traders and brokers alike. For example, most recently we launched Request for Quote (RFQ) and Request for Cross (RFC) functionality. RFQs make more complex strategies in options, like trading spreads, available to market participants around the world right on their computer screen. Sending an RFQ creates a unique and tradable instrument on CME Globex and requests that market participants show bids and offers on the specified instrument (similar to a broker calling into a pit asking for a market). RFC allows a broker to enter a two-sided cross order through CME Globex, working the quantity through the central, electronic market, and then crossing the remaining quantity.
RFQ and RFC, along with strong adoption of CME Direct, have allowed brokers and traders to easily access the global liquidity pool on CME Globex in an efficient, easy to use way. This has made trading options a viable risk management tool to people who might previously have traded only futures electronically, or stayed out of the market altogether. In addition to easier access, trading options on-screen also allows for more transparency, where traders can see the order getting filled on screen.
What’s Next
According to CME Group Chief Economist Blu Putnam, “volatility is back!” and “markets are again responding to a variety of different and hard-to-forecast developments. Uncertainty about when a Fed rate-rise decision could come, deceleration of China’s economy and other factors, are keeping markets guessing.
The good news is options on futures are especially useful in times of increased volatility, like we’re seeing now. They rank among CME Group most versatile risk management tools, offering a more flexible way to manage exposure to a variety of markets. And, importantly, technological advancements such as the introduction of CME Direct have made them more accessible for brokers to trade them electronically.
Getting Started
- Email cmedirectsales@cmegroup.com to request a demo (provide firm type and product interests so we can customize your demo).
- Visit login.cmegroup.com/sso/register/ to set up your SMART Click profile.
- Contact your FCM to begin the account configuration process.
Futures trading is not suitable for all investors, and involves risk of loss. Futures are a leverage instrument, and because only a percentage of a contract's value is required to trade, it is possible to lose more than the amount of money initially deposited for a futures product.
