News

Press Release

GROWTH IN DERIVATIVES TO HAVE PROFOUND IMPACT ON WALL STREET FIRMS



New Research from TowerGroup Analyzes Key Trends, Growth Prospects in Global Derivatives Market



NEEDHAM, MA, September 18, 2006 - The derivatives market is undoubtedly hot, growing rapidly and catching up to the cash market. The notional value of derivatives globally grew from US$98 trillion in 2000 to US$270 trillion in 2005. In the first 3 quarters of 2006, Wall Street has made record profits from derivatives and structured products. New research from TowerGroup finds that US brokerage firms will generate $33.2 billion from derivatives related revenue in 2006.

TowerGroup believes the derivatives market is currently at the tipping point, on its way to coming into its own as an asset class. Over the next three years, TowerGroup expects buy-side derivatives usage to explode, bolstered by the shift to electronic trading, search for alpha, and more accommodating regulations (such as changes to ERISA and the adoption of Prudent Investor Rule), which allow derivatives usage in pension funds and institutional money management.

"We are seeing enormous demand for derivatives from the buy-side, particularly relative to hedge funds, following the relaxation of restrictions on using derivatives for managing money," said Dushyant Dushyant Shahrawat, research area director of the Securities & Capital Markets research service at TowerGroup. "Yet, for many, the derivatives market remains an enigma that is both overly-complex and difficult to grasp."

Highlights of the research include:

  • TowerGroup estimates global IT spending in derivatives will grow 18% annually over the next three years - much faster than the 4-6% for equities and fixed income. Top areas of spending will be risk management, processing and pricing/analytics.
  • TowerGroup estimates between 8-10% of U.S. sell-side revenue in 2006 will be driven by derivatives. This growth will have enormous implications for the technology decisions sell-side CIOs make in forthcoming years. TowerGroup estimates derivatives related IT budgets at sell-side firms will grow rapidly over the next few years already evident in the derivatives rearchitecture projects currently underway on Wall Street.
  • Derivatives are energizing the agency brokerage business and Wall Street firms have been leading their buy-side and hedge fund relationships with derivatives offerings. TowerGroup research indicates that brokerage firms are aggressively bolstering their derivatives staff and expertise which is reflected in derivatives personnel salaries going up by 30-40% over the last 2 years.
  • Globally, there is enormous disparity in derivatives usage. Not surprisingly, U.S. and European firms lead usage over rest of the world, followed by Japanese institutions. Yet TowerGroup believes the fastest growth area for derivatives globally will be seen in emerging markets.

Shahrawat continued, "Playing the derivatives game requires a strong balance sheet for structured products, ability to execute and process trades, talented and innovative people to generate ideas for clients, and a strong cash business as support. Brokerage firms that will succeed in the market will have the vision to combine cash and derivatives under the same management, so expertise is leveraged across products and clients can be serviced across the entire capital structure."

Three new TowerGroup reports on derivatives by Shahrawat are available to qualified members of the press for review.

  • "Derivatives 101: A Crucial Primer"
  • "The Derivatives Revolution: Trends, Brokerage Offerings and Future Growth"
  • "Technology in Derivatives: Poised for an Extended Period of Growth"

Mr. Shahrawat will host a TowerGroup Live Webcast on this research on Thursday, September 21 at 12pm ET. Access to this Webcast is available to qualified members of the press at no charge. To request the Web link and dial-in for the presentation, please contact Lisette Kwong at +1.212.642.7753 or Lisette.kwong@edelman.com. Those interested in purchasing a copy of any TowerGroup report or subscribing to a TowerGroup research service may call +1.781.292.5200 or email service-info@towergroup.com.

At TowerGroup, Shahrawat's research covers all aspects of the Securities & Capitals Markets space, including: institutional trading, automation, financial messaging standards and foreign exchange.

About TowerGroup: TowerGroup is the leading advisory research and consulting firm focused on the global financial services industry. A respected source for trusted information and advice, TowerGroup brings many of the world's leading financial institutions, technology companies, and professional services firms a deeper understanding of the business and technology issues impacting their organizations. Headquartered near Boston in Needham, Massachusetts, and with offices in North America, Europe, and the Asia-Pacific region, TowerGroup serves a global client base. Visit www.towergroup.com for more information.

Contact Us

Press Contact

Karene Gordon
+1.617.488.1918

What's New

Follow Us on Twitter
Connect with TowerGroup Analysts by following us on Twitter: @TheTowerGroup