Glass Half Full: Options Industry Looks Pretty Good To Retail, European Traders

May 7, 2014

The options industry is seeing an uptick in retail participation, with individuals accounting for 24.3 percent of the volume in Q1 2014, according to Tabb Group.

Andy Nybo, principal and head of derivatives research with Tabb, told the audience at the Options Industry Conference in Austin last week that retail investors are increasing their presence in options slowly but surely. Over the past four years, retail volume has risen a compound annual rate of 4.3 percent, up from 21.8 percent in 2010, 20.1 percent in 2011, 21.8 percent in 2012 and 23.7 percent last year.

Nybo said that better trading tools, strong education efforts and low commissions have helped drive retail business in recent years.

“It drives a lot of activity, a lot of business for the retail firms and the market making community,” he said. “One of the things we noted in our study was the rise in the sophistication of the retail trader – complex orders, spread traders. They are mimicking the sophistication of the institutional investors.”

Some exchange executives said its still unclear whether the retail trend is as strong as reported, but Nybo believes several factors are driving the growth. He argues that the execution experience is getting better for traders, especially as more exchanges roll out new price improvement mechanisms. NYSE AMEX, for example, will be rolling out its new CUBE in the coming weeks, a price improvement auction system for single-leg auctions for paired orders. Other exchanges continue to tweak their price improvement auctions which take place in milliseconds, and provide customers with better prices on their trades.

“For the retail investor, he is getting price improvement most of the time as he is putting in a market order,” Nybo said. “So it’s really the retail investor who is living large, getting great execution, great access to the market. That’s why, really, retail demand is growing.”

Tabb’s research also reported continued European growth in US options, now representing about 10 percent of the order flow.

“The European investors absolutely love US markets,” Nybo said. “They love the transparency, the liquidity, and the ability to get in quickly and efficiently, but more importantly, to get out.”

He said options are attracting participants, but so are index and volatility products. The International Securities Exchange is readying a launch of its own volatility options contract, the Nations VolDex Index, based on SPDR S&P 500 ETFs.

There is growth left for the options industry and some work to be done as well. Nybo pointed out that weekly options have been a big hit and as much as 30 percent of the volume could come from weeklies alone in the future. Currently 55 percent of the weekly options volumes are concentrated in the top 10 symbols. EFT options are also seeing nice growth as well, up 28 percent from 2006 to 2013 on a compounded annual rate, and up 14 percent in Q1 2014 from a year ago. Seven of the top 10 options contracts by volume are indexes or ETFs.  

Nybo acknowledges that the regulatory scrutiny over high frequency trading may impact equities and therefore, options. But he said that more volatility in the markets is likely going forward, as the Federal Reserve Bank eases and various geopolitical scenarios emerge.


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