Equity Derivatives Trading Falls First Time Since 2004, WFE Says

Equity derivatives trading fell last year for the first time since 2004 as volatility subsided, according to a report from the World Federation of Exchanges.

Stock derivative contracts, such as options and futures, on regulated exchanges declined 20 percent to 14.9 billion in 2012, according to a WFE release today on the annual survey of global markets. Stock index options had the biggest drop among equity derivatives, falling 40 percent from 2011, the data show.

Derivatives trading slumped last year as the VIX, as the Chicago Board Options Exchange Volatility Index is known, fell to its lowest level since the financial crisis that began in 2007. Stock swings declined as U.S. corporations posted an 11th quarter of earnings growth and American policymakers reached a budget agreement to avoid spending cuts and tax increases in 2013. Futures are agreements to buy or sell financial assets or commodities at a set price and date, and investors often trade the products as bets on price fluctuations.

“2012 was a very challenging year for exchanges,” the WFE said. “Derivatives markets were affected from the continued low interest-rate environment and the significant decrease of volatility, both factors reducing hedging needs.”

Derivatives, a more than $600 trillion market, allow buyers to bet on the direction of currencies, interest rates and markets to protect their holdings, insure against defaults on bonds or lock in a price on commodities. The futures market totaled $25 trillion in notional value as of September 2012, according to the Bank for International Settlements, a Basel, Switzerland-based organization that tracks derivatives.

The VIX, the benchmark gauge for U.S. stock options, ended 2012 at 18.02, 78 percent lower than the all-time high reached in November 2008, during the height of the credit crisis. It slumped 0.5 percent to 12.36 at 12:20 p.m. New York time today.

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