Today’s options market is a mixed bag of some strong products gaining traction but, in general, the industry has slowed dramatically over the past decade.
Henry Schwartz, president of Trade Alert, speaking at the 34th Annual Options Industry Conference in Palos Verdes, California on Wednesday, told the audience that options industry volume growth has slowed from 14.7 percent over the past 20 years, to 8.5 percent over the past 10 years, to just 2 percent in the past 2-year period.
Schwartz attributed the slowdown over the past couple of years to the continued ripple effect from the 2008 financial crisis, and regulatory changes.
The concentration of volume is also interesting. Out of a total of 4,486 names, 130 of them make up about 80 percent of the total options volume. Notably, the top traded contract, the SPY option, represents 15 percent of total volume, followed by a distant second in AAPL (Apple) options with just under 6 percent.
Schwartz pointed out several products that are showing solid growth, even if the overall pie is not growing much. Weekly options, introduced just a few years ago, have taken off.
Weeklies now represent more than 33 percent of the options traded per day.
Complex orders are also on the uptrend, and now represent about 30 percent of the volume, up from 22 percent six years ago. These orders also represent a huge amount of the volume on each exchange, Schwartz said. At the International Securities Exchange, which is hosting this year’s conference, 59 percent of its volume is in complex orders. Complex orders make up 49 percent of volume at AMEX, 48 percent at CBOE and 46 percent at PHLX. Schwartz said he saw no reason complex orders could not represent 50 percent of the total options market industry-wide.
Flex options, which allow investors to customize some of the terms of an options contract, are also gaining some traction, although they are still a small volume category. Flex options could hit 30 million contracts this year, he said, from about 26 million in 2015, quite a jump from their early days when they posted just 3 million in 2010.
Schwartz also outlined the state of market makers in the options space. Today, there are about 26 market makers with the bulk of the options volume dominated by Susquehanna, which he estimated to handle about 25 percent of the total volume. But there are some signs that the market could be open for more market makers in the coming months or years.
One trend that may lead to increased market maker participation is that the realized bid-ask spreads have been widening. On average, the realized bid-ask spread has risen in certain option classes to 6 cents in 2015, from 4 cents in 2014 and 3 cents in 2013. While wider spreads may be considered a bad trend for customers, Schwartz said they have begun to attract new market making firms.
Schwartz believes this could be a virtuous cycle for the industry. As more market makers compete, quote volumes will rise and entice more trading which raises volumes.
Finally, the industry continues to show growth from the institutional side of the business. Schwartz said institutional investment managers, which report 13-F filings with the SEC and indicate options trading, have increased to 735 last year, from 200 in 2001.
He foresees some long-term growth for the industry, which has a history of bouncing back from financial setbacks.
**Also: MIAX Options is also planning to launch the 15th US equity options market called MIAX Pearl later this year, a maker-taker pricing model. (More to come on this from OIC)