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May 1, 2013

Side By Side, but Worlds Apart

Increased Usage of Equity Derivatives Brings Traders Together

By Peter Chapman

Nathalie Texier-Guillot and David Silber sit side by side in Citigroup's equity derivatives department. But their worlds couldn't be further apart.

Texier-Guillot is head of U.S. equity derivatives structured sales, helping pension plan sponsors, asset managers and insurance companies find alpha and manage their trading risks using customized options and other equity derivatives. Silber is head of flow equity derivative sales, helping hedge funds make directional bets using options contracts listed on public exchanges.

David Silber

Two different investing vehicles for two different client bases. And yet to a certain extent, their worlds are converging. Whether it's due to new rules regarding the coming electronic execution of standardized forms of over-the-counter derivatives, spawned by the 2010 Dodd-Frank Wall Street Reform Act, or the tremendous popularity of exchange-traded volatility index products, institutional customers are seeking out similar products offered by both desks.

Traders Magazine sat down with Texier-Guillot and Silber to discover what was driving their businesses.


TM: You are seeing more nontraditional users looking to trade options?

Silber: Some of the users we see coming into the product are those who historically haven't considered the options market. But it's a lit market that allows them to get a handle on their P&L every day.

So they can really experience what something they bought is worth today and what it will be worth at the end of the day. We're seeing a large increase in people who are coming from-not just the stock side-but more esoteric products such as credit. In many cases, it's because of counterparty issues. And typically the listed options market is less sophisticated or complex than the product they are coming from.


TM: What products are they interested in?

Silber: The incoming call is rarely about traditional listed equity options on single stock. It's almost exclusively about the VIX (the CBOE Volatility Index). Normally at the level of the portfolio manager. These are people who have not been in the listed derivatives market. They're drawn to it due to the VIX. At times that might lead to them looking at SPX (the SPDR S&P 500 Index option). Which ultimately might lead to them looking at SPY (the S&P 500 Index ETF option). Which might lead to them looking at XLE (the Energy Select Sector SPDR ETF option).

But the benefit of the product to the listed derivatives market is so much greater than just the volume that trades in the VIX.


TM: Some education is necessary?