Demand rises for the research perspective: Entering a new world

Equity derivatives research analysts typically like to fly below the radar. Aerobatic spectaculars and showy flypasts do not generally form part of their repertoire. But however much they may be disinclined to play to the gallery, their services are increasingly being promoted by banks seeking to distinguish their own services through the quality of their research.

And just keeping pace with the range of demands is no mean feat as, according to Stephen Einchcomb, head of European equity derivatives strategy at JPMorgan, clients now come to them for everything from basic data and data analysis to trade ideas, analytical tools and bespoke analytics - in more or less equal measure.

Pam Finelli, head of European equity options strategy at Deutsche Bank, adds: "The equity derivatives research offering has to be comprehensive, covering broad themes and interpreting sentiment; providing specialised research data and isolating and examining particular opportunities and strategies."

A good portion of the Deutsche analysts' time is spent putting together thematic reports, explaining derivatives movements, deciphering the signals transmitted by market sentiment or generating directional ideas. But the majority of their time is devoted to undertaking bespoke analysis for clients and working with them to find the best solutions for their portfolios. "For example, investors that want to hedge equity exposure will want to back-test the strategy, to check it forward under different scenarios and to look at best ways to hedge a risk, given particular considerations," says Ms Finelli.

Regular reports

Vincent Cassot, head of equity derivatives research at Société Générale, agrees. While it is common for banks to have flow coverage - daily volatility reports, for instance, are an industry "must-have" - he says there is also big demand for customised research, as well as the capability to explain special situations, such as those which recently prevailed in the variance swap and dividend markets. "To answer this latter need, we produce special reports, focusing on particular market phenomena so that clients can clearly understood why markets behaved as they did," says Mr Cassot. "But what really makes us stand out is our ability to cover the full spectrum and to work with all client types on a day-to-day basis, working with them to interpret data and isolate themes, responding to all their different needs and coming up with relevant trade ideas."

Simon Carter, head of equity derivatives flow research at BNP Paribas, believes that research today is much more about helping clients to analyse and understand the benefits and risks of potential trading opportunities - and much less about rolling out endless detailed technical publications. "Coming up with a solution to a particular opportunity involves having a dialogue with clients at both technical and fundamental levels, as a successful trade idea usually requires both areas to be satisfied," says Mr Carter.

The BNP equity derivatives flow research group also dedicates a lot of time working with clients on specific ideas and needs, operating almost in an advisory capacity. "Even a lot of the hedge funds that trade pure volatility have become much more interested in ensuring that fundamentals support the idea," says Mr Carter. "It is no longer just a question of whether the numbers stack up; they have to be able to justify the trade based on a view of how the future will pan out."

The key to maintaining the appeal of the offering, according to Mr Einchcomb, is to keep it dynamic, responding to changing client types and evolving client needs. The recent 'back-to-basics' trend, for instance, has had to be reflected in the research output. As market conditions have forced investors to fall back on plain vanilla instruments and larger index products, banks have had to adapt with them. He says that JPMorgan has consequently been putting less emphasis on generating name-specific trade ideas and more on producing bespoke research, tailoring quantitative screening tools to clients' specific requirements and, more generally, producing thematic research.

Macro focus

Abhinandan Deb, director for research at Barclays Capital, also says that the shift in focus away from complex products and strategies has had to be reflected in research, as has an increased focus on macro factors that have driven markets in the past year. But this is not just a one-way shift. Ms Finelli says that at Deutsche, as specialist trading strategies - such as correlation and dividend trading - have become appealing to more traditional investors, the research offering has had to adjust.

Mr Einchcomb's experience has been similar. "Previously, many investors using the more sophisticated products - such as dividend or variance swaps - needed very little help," he says. "That is no longer the case as a whole new set of investors has entered the market, asking in-depth questions and requiring more education. At the same time, the original investors' risk managers and back and middle offices have started demanding more information and vetting positions both before and after the trading point."

Analysts have, of course, a need to justify their existence and, for many, it is easier to demonstrate their worth, and to gain visibility and client interest, if they can provide practical trade ideas. But, as a result of poor performance last year, many investors now have more limitations in terms of risk management and it is more difficult for them to just go out and trade. Typically they will have to justify a strategy to management before implementing it. As a result, investors are looking far more closely at the reasoning behind the different calls - and demanding far more of their analysts.

"Clients really want to look into the arguments - both technical and those driven by fundamentals. We have to work harder now, given that there's more interest in the view on volatility, and must be prepared to stand our ground with good explanations," says Mr Deb.

The new regulatory environment is also playing its part. "There is also a good amount of demand for bespoke research, particularly from pension funds and plans," says Mr Einchcomb. "These will have a regulatory exposure to volatility and need a solution which solves that. In such instances, we will work closely with them to devise several alternatives, to do risk-return analyses on them in the context of their particular portfolios and to help identify the optimal solution."

Dealing data

Data is another important means by which firms believe they can differentiate themselves. This may be surprising, given that much of it is derived from the listed markets and is widely available, but analysts insist that their own data is deeper, better and wider than anything available publicly.

"Everyone has data, but there is a spectrum in terms of the quality; we have some really high-quality data that goes back many years across a range of indices and stocks," says Mr Carter.

Likewise, Ms Finelli believes Deutsche has the most comprehensive options data available on its specialist website, and that clients value it so highly that it often a real determinant in their readiness to do business with the bank. "The breadth of information available on ederivatives.db.com was a real help to our clients during the unprecedented volatility last autumn," she adds.

European exchanges

To a certain degree, this phenomenon is restricted to Europe where listed equity options trading is highly fragmented. As well as being split across multiple exchanges, a sizeable amount of business goes through in the over-the-counter [OTC] markets and is therefore not recorded. By contrast, all options trading in the US takes place on the listed markets and is concentrated within a single clearing house. As a result, it is rare that investors can access comprehensive data sets on European options from a single provider and, according to Mr Deb, it also means that the quality of the publicly available data, if untreated, can be poor. "Investors therefore look to us to provide a suitable data offering that includes OTC markets," he says.

Other data that is not typically available publicly is the implied and realised volatility data and volatility skews. Nor will clients necessarily be able to chart single-name option prices against indexes or look at historical data.

Mr Einchcomb says: "We have valuable skew data and bid-offer information which many of the generic providers don't have, as well as implied and realised volatility data going back 10 years and datasets from other asset classes, such as credit. This is immensely helpful as, generally, investors will want to contrast data across asset classes and test strategies over business cycles."

According to Ms Finelli, the way in which data is presented can be just as important as the quality of the data itself. "There is a lot of data out there but there is a big premium on data, particularly high-quality data - and particularly on being able to access a comprehensive, accurate, up-to-date dataset flexibly and intuitively. Such tools are very important, particularly in high-volatility markets, when clients will want to examine all the parameters carefully before putting on new trades and will often need to justify moves or strategies to management," she says.

Most of the banks canvassed have developed their own web-based analytical tools to which privileged clients are given access. While Deutsche has its widely lauded ederivatives.com platform, BarCap has two such tools - VarAPP, a one-stop shop for variance swap relative value analysis, and Base, for stock option screening.

Mr Deb says: "Clients can use VarAPP to come up with their own ideas and to examine how trade ideas work out under different market scenarios, and Base, which is highly valued by asset managers, enables clients to screen for names within their portfolios that are suitable for different stock option or overlay strategies. If, for instance, they are looking to overwrite single names, they can enter a universe of names, select suitable screening criteria, check for options activity and so on."

Multiple resources

JPMorgan's offering, dubbed Dataquery, can be employed by the bank's clients to determine which stocks might be best suited to a particular strategy that they are pursuing, using a variety of different parameters. "They can graph and play with our data, comparing equity derivatives and credit derivatives data, for instance, and they can also screen options and do time series analysis across asset classes," says Mr Einchcomb.

SocGen's VolHub is based on the bank's research database and offers customised online analysis and research tools. SocGen analysts use the data to develop trade ideas and produce research reports, whereas their clients use it to screen the market and produce their own analyses; they can also add customised information or views, and a drag-and-drop system allows them to graph what they want online, and or extract the data they want to work with.

The platform has represented a huge investment over several years, according to Mr Cassot, but a worthwhile one. "It is a genuinely useful tool of the sort we could only ever really dream about before, when we were labouring with standard calculation applications," he says.