Interest in derivatives is at an all-time high. Last year, the Options Clearing Corporation (OCC) reported clearing a record-setting 9.93 billion total contracts, a 33.7% increase over 2020. With the rise of retail trading platforms, greater use of equity options by institutional investors and the knowledge that traders can more easily employ options trading to express their views in a leveraged manner, liquidity in these markets has increased, creating a self-fulfilling prophecy of greater adoption.
We see this reflected in our own business. For the calendar year 2021, Tourmaline Partners traded an average of over 3 million equity options contracts per month, a substantial increase from 2020. This complemented over $450B in notional equity value traded, a clear sign that buy-side managers and traders have grown increasingly comfortable engaging outside trading expertise.
Accordingly, we are receiving more inquiries than ever about our derivatives capabilities. In that spirit, we’d like to provide a basic overview of our approach to this asset class and how our structure, scale and expertise create a differentiated equity derivatives trading experience.
Tourmaline trades listed equity and equity index options for clients in the U.S., the UK and the Asia-Pacific region, focusing on U.S. market instruments. As is the case across our business, the buy-side entities that lean on us in these markets run the gamut in terms of size and structure, from smaller firms seeking a fully outsourced solution to larger institutional asset managers looking to supplement their reach, access to liquidity and information flow.
One primary factor in our success is our expertise – an important consideration in any market, but especially for derivatives. Our derivatives team was originated at Tourmaline’s founding in 2011 by our CEO Aaron Hantman, who built his career at Susquehanna International Group, one of the industry’s leading players in this space. Today, the team of four dedicated traders averages more than 25 years of experience in these markets.
When it comes to the myriad decisions that go into trading derivatives, the value of an experienced team cannot be overstated. Our traders have built their careers interfacing and building trust with the most prominent liquidity providers in this space. We know who the key players are, what they’re doing on any given day and what vertical-specific expertise they may have. We have the flexibility to access them on both a high-touch and electronic basis.
From there, we make optimal decisions based on the trades we have on our desk at the time, current market conditions and the judgment and discretion of the team. All of this involves drawing upon our derivatives expertise to identify the best liquidity path in real time, high- or low-touch, prioritizing our clients’ goals and preferences at every step.
Our scale is another important factor in how we face these markets. The aggregate size of our order flow, representing numerous underlying clients, creates tremendous leverage. This enables us to judiciously pick and choose our counterparty relationships and consolidate around a carefully selected group of providers with deep liquidity, which affords us tremendous pricing power.
Additionally, and importantly, our independence provides anonymity for our clients. We never shop our order flow, we do not use interdealer brokers and our liquidity providers do not shop or share our orders with multiple parties, presaging our clients’ intentions. Of paramount importance: every step of the order lifecycle occurs under the Tourmaline name, providing anonymity and ultimate discretion to our clients.
While some of our clients are seasoned derivative players, many are traditional equity investors who use Tourmaline to create and implement strategies around their positions and monitor them over time. Many investment managers, even larger ones, do not always have dedicated options traders in-house.
Tourmaline helps by providing a turnkey solution to access this asset class thoughtfully and anonymously, with the benefit of being agnostically positioned in the marketplace.
As the use of supplemental equity trading has grown with both traditional managers and asset owners, it makes sense that many of these players will engage outside expertise in other asset classes, notably derivatives. In 2022, we project continued growth throughout Tourmaline, and we expect to see more of our clients with varying levels of options expertise leverage Tourmaline’s unique capabilities.
To learn more about Tourmaline Partners’ approach to trading equity and equity index options, please reach out to us at info@tourmalinellc.com.
Matthew Sindell is a Managing Director with Tourmaline Partners.