Earlier this week we looked at some of the major developments that shaped the US listed options industry over the years, and now I’d like to look forward at what trends are taking place and what we may see in years to come.
It goes without saying that exchange and participant technology will continue to evolve, increasing transaction speed and removing what little friction remains in the trading process. While many gripe about the expense involved in handling peak OPRA data rates over 15 million messages per second, no one is complaining about the 30million contract days such systems make possible.
Spread trading is already an important part of the market, making up nearly 1/3 of the market-wide average daily volume, or some 5 million contracts per day. A number of exchanges offer complex order books (COBs) that streamline the process and the recent ‘implied order’ functionality added by the ISE dramatically raises the bar by creating ‘cross liquidity’ between the COB and limit order book. Challenges exist in the space, including a mess of nonstandard functionality, ‘spam orders’ and fragmentation, but vendors are already stepping into the void with innovative solutions that clean and normalize the data to best suit the needs of traders, brokers, and customers with minimal cost and complexity.
I expect we will see additional options exchanges launched to capitalize on growing volume and meet the demands of the order-flow providers. It’s unlikely, however, that these will be independent entities given the massive advantages in terms of regulation, technology, and staffing that existing exchange operators already have. One leading exchange official recently pointed out that adding new exchange in the electronic-era is not much more than “copying our rule book and firing up a new server,” with member firms seeing benefits in shared technology (if not membership fees!).
Short term options are one of the biggest success stories in recent memory- with nearly 5 million contracts trading daily, nearly 1/3 the market volume. In Apple, fully 50% of flow is in weeklys, and despite protest from some participants, Bloomberg reported in 2010 that CBOE was pursuing ‘daily’ option listing- which might resurface if volume stagnates.
Another area for growth is FLEX options- those where custom expiration, strike, and exercise style are specified by the initiator. FLEX trades tend to be ‘under the radar’ but with nearly 2.34Million contracts of FLEX open interest outstanding, the potential is clear. Recent rule changes permit very long-term FLEX trades, and as positions automatically roll into listed options if/when terms match, improvements in the transparency of FLEX might go a long way to bringing additional flow to the product. FLEX might also be a place to try ‘cash settled’ equity options that have been suggested in the past. One industry veteran notes “cash settled options would attract retail shareholders who could over-write without fear of losing their stock, at the same time lowering the cost of stock-replacement strategies for institutional buy-side firms.” As regulation begins to curtail some of the largest trading desks activities, alternatives in our listed markets have a good shot at gaining traction.
I appreciate the chance to share my thoughts with the JLN audience this week and look forward to many more years in this exciting industry. In a few short decades the options market has grown up- developing a level of efficiency and transparency that serves as a model to global securities trading. Our fast-paced high-stakes business presents significant challenges and opportunities, best met with innovation and creativity by the talented people involved.