The derivatives market is evolving rapidly, driven by liquidity shifts and product innovation. As investors adapt, new opportunities are emerging from index-based solutions in alternative asset classes to the growing interplay between exchange-traded and over-the-counter markets.
1. What key trends are you seeing in the derivatives market today?
The derivatives landscape is constantly evolving, and there are several key trends that are shaping the market today. First, liquidity remains a critical issue across asset classes, and we’re seeing more demand for derivatives with high liquidity and tight spreads.
Second, regulatory changes continue to impact how derivatives are traded, with ongoing adjustments to clearing, margin requirements and transparency standards. This has created both challenges and opportunities for firms like ours to innovate in supporting more flexible, cost-effective solutions. Lastly, product innovation is key — there’s an increasing interest in derivatives that serve more niche markets such as non-traditional weighting schemes, equity dividend and stock lending rates, and there’s growing adoption of index-based solutions in asset classes beyond traditional equity beta.
2. What does this tell you about investor sentiment for 2025?
Market participants are reacting, in part, to an increasing diversity of performances across and within asset classes. Cross-market and intra-market correlations have recently made, or are near, multi-decade lows, and the effects are visible in a range of markets — from more emphatic, idiosyncratic stock price reactions, to earnings releases, to the increasingly distinguished performance of bond and equity markets in countries from Japan to Latin America. Most obviously, a more granular toolkit allows market participants to adapt with greater nuance, for example, by targeting a greater risk reduction through diversification effects or, conversely, seeking specific returns from a narrow focus on a particular segment or style that they see unique prospects for. This is manifest in the increasing popularity and range of index-based products, especially (but not only) including exchange-traded funds (ETFs).
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3. How has the role of exchanges versus over-the-counter venues changed?
As an index provider, we seek to meet the need for clear, transparent reference points that can underly financial products. Our indices are licensed by exchanges and many other kinds of market participants. Both listed and over-the-counter markets have grown considerably over the past decade, and they are increasingly interlinked. The existence of a popular, highly traded beta instrument for any particular market segment can aid the design and creation of more sophisticated strategies in that space, because the strategies can tap into that liquidity to assist in scaling, pricing and management of the exposure. In the micro sense, the listed and over-the-counter markets are sometimes in competition; in the macro sense, they can help each other’s growth.
A good example of this is the increasing range of products and liquidity available in products tracking various segments of the fixed income markets. This has had the consequence of enabling faster and more effective portfolio trading in the bond markets, as well as increasing the number of long-short strategies that might be implemented at reasonable cost on an over-the-counter basis. More equity market makers are starting to participate in the fixed income market as well, bringing with them advanced trading technologies, liquidity provision techniques and sophisticated pricing models, which can help improve efficiency. All of this has led to enhanced price discovery and tighter spreads in fixed income ETFs, and related instruments, so that systematic credit strategies that might have historically shown profits on paper but lost all their edge in real-world trading costs might now take advantage of an ecosystem of tradeable, index-linked products to implement parts of the strategy. They might even encode their strategy into an index.
