Investment managers have always been the holy grail for options brokers, exchanges and technology providers, as one multi-billion-dollar institution that buys and sells puts and calls can generate more volume than hundreds of retail traders.
The institutional perspective was in focus Wednesday afternoon at the Options Industry Conference in Asheville, North Carolina, in a panel entitled “Behind the Curtain: A Buy Side Conversation”.
Panel moderator Joe Lewis, Head of Corporate Hedging & FX Solutions at Jefferies, opened the discussion with a question about innovation in buy-side use cases in options.
Blake Dinger, Portfolio Manager at SpiderRock Advisors, said there isn’t really a single product to highlight, rather the trend has been about the “grinding road” of customizing family office and institutional portfolios.
Eric McArdle, Managing Director, Advisor Solutions at Simplify, cited increased demand for products that speak to behavioral preferences, for example risk aversion, loss aversion, or income generation.
Megan Morgan, Head of Market Structure at Belvedere Trading, noted that while short-dated options such as zero days to expiration (0DTEs) have generated the most buzz of late, there has been quieter growth in areas such as longer-dated and flex options.
Lewis then posed the question of how the industry can best allocate resources to support growth.
Dinger said traditional retail end-client education is important, but a better use of time and effort would go toward educating the next level up, i.e. those who speak directly with the end client.
McArdle took a different angle, saying that “educating asset managers who aren’t using options is a huge opportunity.” There remain many asset managers who have never traded an option, and even if they have been approached about adoption in the past, market advances since then can be a reason to try again. “You can go back to them and say you should be considering this.”
Morgan noted her experience in trying to get pension plans interested in options, which typically ended when their Board, often composed of retired teachers, wouldn’t approve.
That outcome can be different now. “There is more of a base of education around options, and you can better explain structures,” she said.
Panelists noted the explosive growth in ODTEs, though they were skeptical about its capacity to sustain future expansion.
“For all the talk, we don’t have many clients coming to us for this…It seems to be siloed off” as its own part of the market, Dinger said.
“In product development and delivery, we don’t see much demand for that type of exposure,” McArdle said, noting there are valid concerns about 0DTEs causing a blowup that would make the headlines.
Morgan said “there are other opportunities that could drive innovation in a more balanced way.”
To the question of where the industry will be in five years, Dinger highlighted the opportunity for more outreach and education initiatives, while McArdle stressed the importance of distribution. “If we want more innovation and a more dynamic ecosystem, we have to think of it as growing the pie together, and this starts on the distribution side,” he said. “It’s about storytelling.”
Lewis closed the panel by highlighting the importance of the options industry leveraging education and quality innovation to connect with the coveted constituency of people with between $1 million and $5 million of assets, and rarely if ever use options. “Everyone is putting time into this group,” he said.
