The Aggregated Wisdom of Henry Schwartz

Spencer Doar

Spencer Doar

Associate Editor

In December, JLN was lucky to have Henry Schwartz of Trade Alert as a guest editor for the JLN Options newsletter. Some of you might have missed his contributions from that week – below is a post comprised of all of his observations with some slight edits. His columns are listed in chronological order from when they were published (12-12-16 through 12-16-16).

Complex Orders and Daily Options Volume

It’s a great honor to edit the JLN Options newsletter because I have always found it to be a crucial source of timely and relevant news (and not ‘fake news’) for professionals in our dynamic industry! Tapping into the massive data stores we have collected over the past decade at Trade Alert,  I will do my best to highlight a few trends and issues.


While spreads have been a part of the options business since synthetic puts began trading in OEX circa 1973, they have become a greater and greater part of the picture as markets have automated, in large part because automated complex order books have streamlined the trading process. Of the 14 exchanges operating today (and MIAX Pearl slated for February), eight now have complex order books and fully one-third of the typical day’s volume is marked spread. Zooming in on the three largest exchanges by volume, CBOE, ISE and PHLX, our data shows 49% of their flow to be part of complex orders, which explains why MIAX recently launched COB functionality, and BATS will soon follow suit. From my view, the most exciting thing about complex order functionality is how it brings a much-needed shot of innovation and creativity into our market, which is good for everyone.


Complex Orders (Continued)

We noted the steady growth option volume coming from complex orders, which now accounts for about 1/3rd of daily flow. Today’s chart shows November volume stats from the largest complex order books, and includes a snapshot of which types of spreads were the most common in yesterday’s session.  


As many would expect, simple vertical call and put spreads lead the volume, while Friday’s quarterly expiration will boost calendar and diagonals activity as the week progresses.  An honorable mention goes to some good-sized collars trading in some of the names that have seen significant post-election gains.  Bank of America, for example, saw nearly 30K zero-cost collars opened this morning with very flat skew providing near symmetrical 11% out-of-the-money protection in exchange for upside.


Sweeping change

Over the past 30 years the options market has evolved from four exchanges enjoying monopolistic single-listings to a highly competitive landscape of 14 (15 in February) venues with nearly all liquid products listed on all exchanges, fragmenting liquidity and adding a great deal of complexity to even relatively small trades. Leading participants have responded to this market structure with sophisticated ‘smart routers’ designed to optimize executions in the form of maximized liquidity and minimized fees. Sweep trades now make up nearly 40% of average daily option volume – nearly 7 million contracts, with an observable duration well under 1/10th of a second.

This sweep of Oclaro calls lifted offers on 9 exchanges within 3 milliseconds, for a total of 3419 contracts, or nearly 4x the shown BBO size before the trade.  Given the investment required to optimize routing under dynamic market conditions it’s no surprise that a handful of firms now provide routing services for the entire market.  Interestingly, one algo-specialist at a leading router noted that 3ms is actually much slower than the true duration of the sweep from the point of the trader, which they clock as fast as 300 microseconds in typical market conditions!


Building Blocks

The flip side of smart-routed sweeps we discussed yesterday is high-touch institutional block trading. While fragmentation and automation are primary features of our market at the exchange level, hedge funds and pension managers care very little about maker-taker fee models and rebates – they simply want efficient executions and a smooth trading experience.

Today’s chart breaks total single-stock option volume by order size. The top line is 10 lots and smaller, while the bold grey line is the largest block, above 5000 contracts.  The spike in large-blocks in late 2015 is related to synthetics trading ahead of the GE spinoff of Synchrony Financial.  Overall the data suggests a surprisingly stable level of large-block flow over the past two years, which is good news for the community of trading desks and brokers who service this segment of the business.


The year in options: A tribute to David Letterman

I’ve really enjoyed sharing some insights and data from the US options industry with the readers of JLN Options this week.  Next year will mark my 30th in this business, which I’ve watched evolve from a surprisingly effective frenzy of hand signals and paper tickets on the floors to a highly efficient hybrid marketplace where some nearly $6B of premium changes hands daily.  While a number of challenges face many of us, I’m very proud of how well the industry has developed in terms of fairness, efficiency, accessibility and capacity, and I look forward to more good things in 2017.  Happy New Year!

To finish the week I’ve come up with a few Top 10 lists for 2016.  Enjoy them and please don’t hesitate to reach out if you are looking for anything in the realm of real-time options market intelligence!


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