The clear message from FIA Expo was that the options industry needs market makers and regulators are making it hard on market makers.
At the risk of sounding like “South Park’s” Mr. Mackey, that’s bad, m’kay?
Adding to the current quandary of market makers in the options space is the sheer number of markets that need making.
While kicking off the “Equity Options Exchange Leaders” panel, moderator Patrick Hickey, head of market structure at Optiver, discussed the bloated number of strikes that participants have to deal with when trading and choosing strategies. Hickey also displayed an illustrative graph of the ever waning attention span of Expo-ers as the conference progressed.
Perhaps it was that subtle nudge to keep things interesting which prompted the panel to spend an extended amount of time using the proliferation of different styles of jeans as an analogy to the ever-expanding number of strikes. Basically, there are too many types of jeans — boot cut, torn, skinny, et al. — for people to choose from. What if an investor/fashionista simply wants to trade/buy straight leg Levi’s?
The discussion fluctuated, as participants pointed out that different occasions may require different attire, and that over time maybe an investor’s appetite dictates altering the size of jeans one needs to purchase. Something that was not included in the analogy was the possibility that there might just be too many vendors offering jeans to the market. That is a problem exacerbated by a “keeping up with Joneses” factor where the moment one exchange sees the other hawking denim overalls, that vendor feels pushed to offer the product as well. The irony, of course, was that in a room full of industry insiders and leaders, there wasn’t a pair of jeans to be seen.
The good news is that, obviously, everybody is aware and in discussions to confront the issue. The solution will be multi-faceted. Some ideas floated were modifications to RFQ systems, increased harmonization efforts amongst exchanges, giving market makers the choice to only focus on certain strikes and not have to delve too far out of the money, and increasing compression effectiveness.
Beyond solutions to the unintended consequences of regulations and compliance, participants in the “What innovative new products and technology are on the horizon?” panel took out their crystal balls and offered a few predictions.
1) Options on futures will become palatable to the retail investor and will grow in scope.
2) There is more room for “shadow exchanges” that trade in private companies.
3) The success of crowdfunding will spill over into the trading space and become a source of capital.
4) The speed arms race to zero will continue unabated, though most firms will be content to be “fast enough.”
5) Bitcoin’s presence and effects will continue to grow in the industry and thus will incur increased scrutiny of regulators, making some exchanges even more leery to fully embrace bitcoin and its underlying technology.
For more predictions about the future of the industry, stay tuned for JLN’s upcoming video series “Sweet 16: The Tops for 2016” sponsored by Cinnober.