Growth will be faster than the 4% to 6% predicted for equities and fixed income, as dealers invest in risk management, processing and pricing and analytics.
TowerGroup says it expects buy-side derivatives usage to “explode”, bolstered by the shift to electronic trading, the search for alpha returns and regulatory changes in the US that allow derivatives to be used by pension funds and institutional money managers.
The research group estimates that banks and financial institutions will increase spending from $3.6 billion in 2006 to $5.75 billion by 2009.
Dushyant Shahrawat, research area director of the securities and capital markets research service at TowerGroup, said: “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. Yet, for many, the derivatives market remains an enigma that is both overly complex and difficult to grasp.”
TowerGroup estimates that between 8% and 10% of US sell-side revenue in 2006 will be driven by derivatives. “This growth will have enormous implications for the technology decisions sell-side chief information officers make in forthcoming years. Derivatives-related IT budgets at sell-side firms will grow rapidly over the next few years. This is already evident in the derivatives rearchitecture projects currently underway on Wall Street,” the research group said.