The lifecycle of exchange-traded derivatives

Using a comprehensive dataset covering most derivatives trades reported to US exchanges since 1954, we present distributional estimates of the rate at which derivative trading volumes rise and fall. Results suggest that the lifecycle of cleared derivatives shifted in the 2000's. Derivatives with low trading volumes moved to modest volumes with increased probability. Prior to that shift, less popular contracts were likely to remain at low volumes or be delisted altogether. This additional resilience from low levels of trading improved the trajectory of trading volumes for the marginal contract, despite the decade's launch of a record number of new contracts and historic abundance of rarely traded contracts. The New York Mercantile Exchange, an exchange that shifted abruptly to electronic trading, provides some evidence that this shift was driven by new technology. We present our analysis as a non-stationary Markov model, estimated using Bayesian methods. This approach offers simple summary statistics to inform the launch of a new derivatives contract, organized in a model that describes the dynamics of the derivatives market as a whole. This facilitates distributional comparisons among historical groups of contracts (e.g. across time, exchange, or product type) as well as simulation of new derivatives emerging over time.