Growing Demand for Volatility Products: Traders and Firms Seek to Leverage Market Volatility

The riskiest part of financial markets is also what enables traders to profit from them — their volatility. Since the prices are never stable, but instead they keep going up and down depending on a variety of factors, traders seek to buy when the prices are low, and sell when they go up.

Whenever there is an increase in volatility, it is immediately followed by a surge in volume as traders and investment firms come to make their move in hopes of earning profits. A recent study has found that participants in the trading industry are now after new products, which would allow them to leverage market volatility even better than before.

A new study shows growing demand for volatility products

The study was conducted by Acuiti, in association with MIAX. After analyzing the collected data, the two discovered a significant increase in demand for volatility products, especially in the derivatives markets.

Companies and individual traders alike are looking for new ways to hedge risk and boost their profits from price fluctuations. Increased volatility has been a part of the equity markets since 2020.

The study, called Expanding Horizons in Volatility Trading, has found that 44% of the Futures Commission Merchants (FCMs) have reported growth in demand for trading volatility between 2020 and 2023 from their clients. The research involved 94 different entities, including hedge funds, proprietary trading companies, interdealer brokers, banks, and even major FCMs that serve the derivatives market.

The data suggests that companies that seek to profit from volatility trading are even interested in expanding their ecosystems to include new tradable products in addition to the established ones. More than that, traders want new and innovative products that would make the trading process cheaper. They wish to use products with lower trading fees and better execution.

Traders want exchanges to expand their offerings

The most popular products appear to be options and futures, particularly those with small tick sizes. Meanwhile, traders are pressuring exchanges to show greater innovation and introduce even more new concepts.

There has been particularly strong demand for new derivatives contracts, indicating a growing appetite among traders who wish to expand their trading options. Acuiti’s head of research, Ross Lancaster, commented that there is significant room for innovation in volatility markets. Traders seem to feel this as well. “Different products with different methodologies will enable firms to trade across different measures of volatility, expanding the strategies used and creating basis and arbitrage trading opportunities,” he added.

The new report also mentioned that volatility trading is likely to see substantial growth moving forward, as companies intend to adopt this asset class and add new products to satisfy the surging demand. In doing so, they are likely to help volatility trading expand even further. The report also revealed that short-dated options trading is a growing trend, potentially boosting expectations for listed volatility products.