By Hugh Spencer, Global Head of Equity Trading, Janus Henderson Investors
Whilst the themes of automation and the infusion of artificial intelligence into daily workflows for buy-side trading desks have been thoroughly socialized by industry practitioners, ever so quietly in increase of derivative based activity has been on the rise. New hires to trading floors across the globe have rightly stepped into their respective roles armed with expertise in the data science realms driven by quantitative mindsets capable of analyzing and actioning information to generate greater executional efficiencies. Yet demand for individuals with experience in the opaque arts of non-linear optionality has distinctly increased as traditional fund managers are exploiting ways to optimize their performance and thoughtfully separate their performance from the pack.
This divergence in momentum away from the landslide of attention towards systematic methodologies has placed the onus on trading desks to lean back into the more creative strengths of traders under their employ. Idea generation, external stakeholder relationship management, intuitive interactions with portfolio managers and taking a more active role in the investment process have seemingly never been so prominent given the demand for derivative based solutions. Coming full circle, the ability to meet this demand has never been more achievable, given the complimentary nature of automations ability to provide traders with greater capacity to apply more focus to complex workflow. Thus, we find ourselves never more empowered to take the opportunity to add value in the world of derivatives in a risk adjusted manner for the ultimate benefit of our wonderful clients.
Whether trading for fund managers in the diversified alternative space or deploying the strategic exit of a position for an active growth fund, the requisite skillset to provide solutions to a broader investment team in a myriad of instruments and structures flowing through trading desks today can become highly technical. Trading desks must collectively view this as an opportunity to grow and foster individuals seeking greater latitude in their career paths and knowledge journeys. The mindset of asset managers and their execution departments must continue to shift to a perspective that is more multi-asset inclusive, providing traders with the ability to expose their intellects to this specialized aspect of the industry. This will in turn place trading teams in the enviable position of ultimately tailoring systems and execution platforms to be more ubiquitous and less specialized for navigating and executing non-linear instruments.
Speaking in generalities on present trends in the market, the rapid delivery of information via social media and wider access to trading tools have led to elevated market volatility. To better manage risk and take advantage of price dislocation from macroeconomic events, we have seen an increase in the popularity of short-dated options (zero day or weekly options) stemming from inherently long institutional investors. These options averaged more than 40% of SPY options volume in 2023. Exchanges around the world are also jumping on the bandwagon with Hong Kong Exchange launching weekly stock options at the end of 2024. More frequent expiries can allow for more ‘precise’ trading and hedging while shorter expiries reduce the premium outlay for such strategies. Subsequently, derivative strategies, once the domain of institutional traders, have become more accessible to a broader range of investors. This democratization driven by technological advancements has simplified complex investment strategies. The market has seen a surge in innovative financial products, including ETFs that use derivatives for various objectives, products that allow investors to implement sophisticated strategies without directly engaging in the complexities of derivative trading.
Skillsets aside it’s not surprising that the integration of new technology stands as foundational driver of growth in more sophisticated derivative-based investing. Strategies seeking to hedge, generate income or purely enhance performance leveraging options, futures, and swaps have benefited from advancements significantly. This evolution has been fueled in a large part by technological advancements in automation, playing a critical role in enhancing the effectiveness, accessibility, efficiency and analysis of execution. Automation has naturally been complimented by the overall rise in algorithmic trading in derivatives, enabling the execution of high-speed, high-volume trades based on predetermined criteria. This capability allows for more nuanced risk management strategies in derivative investing, tailoring hedging approaches to specific market conditions. Additionally, technology continues to improve portfolio optimization tools utilized to help investors optimize their portfolios by analyzing potential outcomes of different derivative strategies, considering correlations and market dynamics.
As the trading of derivatives moves further into the lights of main-street, the investment from the sell-side into intelligent yet palatable quantitative analysis of non-linear market activity has risen to prominence. Equipping trading desks at asset managers with the analytical ammunition to thoughtfully work in tandem with their respective investment teams to strategically enhance performance for their end investors. Further reinforcing the edict that future of many trading desks at asset managers lays equally anchored in technology driven automation and traditional derivative acumen alike.
This article is the product of a collaboration amongst the Janus Henderson Equities Trading Desk.
The opinions and views expressed are those of the author(s) and are subject to change without notice. They do not necessarily reflect the views of others in Janus Henderson’s organization and no forecasts can be guaranteed. Opinions and examples are meant as an illustration of broader themes and are not an indication of trading intent. They are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector.
