OIC 2021 was unusual compared to past conferences for a lot of reasons, one of which was noted during the panel, “Retail Rises,” on Day One of the show. When JJ Kinahan, chief market strategist of trading services at TD Ameritrade, asked Christopher Larkin, managing director at E*TRADE, what he saw as the biggest changes to the market over the past year, Larkin said it was that a discussion about the role of retail trading in the options markets had become a big enough topic that it warranted a Day-One spot on the conference’s agenda.
“You and I have been doing panels for a long time, and this will be the first time that they’ve talked about retail on the first day of an options conference,” he said. “You and I are usually doing the 4 p.m. Friday afternoon session … it’s nice to be part of the kickoff of the conference!”
Over the past year, due to a myriad of factors – not the least of which was the pandemic – retail trading experienced an unprecedented boom in options trading volume. Arianne Criqui, senior vice president of options strategy and products at Cboe Global Markets, said that Cboe noticed that much of the upswell in options trading volume was largely in shorter-dated trades – trades with two-day expirations and under – that were smaller than trades usually made by traditional institutional asset managers, “who tend to trade in larger sizes with longer time horizons.” She referenced a survey published by Deutsche Bank this year, which found that 50% of U.S. retail investors were “completely new to the markets.”
Much of the growth in the interest in options over the past year was focused on single-stock options, possibly because newer investors preferred stock picking based on companies they already knew. Dave Silber, head of institutional derivatives trading at Citadel Securities, said, “I think that equity options [are] a topic I can discuss with my mom as opposed to, you know, her not being really sure what I do for a living. I think equity options is a topic I can discuss with my friends who work in various industries, who are now reading about it or learning about it on social media. I think that the breadth of interest in the market is really exciting, and I think it’s something that can lead to continued growth.”
Kinahan and Larkin also noted the new interest in the options markets among retail traders seemed to be relegated specifically to single-stock options. “It’s almost like ETFs are taking the backseat for the first time in…forever,” Kinahan said. “Another part of it is the variety of the single-stocks that are out there.”
“That’s what retail gravitates towards,” Larkin said. “Across the board, every industry. It’s not just technology sectors.” He said that the pandemic had caused interest in companies like Pfizer and Moderna, two large pharmaceutical companies that developed vaccines to fight the coronavirus.
Although the pandemic played a major role in the retail trading explosion in the options markets, Larkin pointed out that the move to zero-commission trading in 2019 also was an important factor. “When everybody reduced to zero dollar commissions back in fourth-quarter 2019, that was the catalyst…if you take our total options contract volume from fourth-quarter 2019 when we were still charging commissions up to today, our options contract volume is up 130%.”
Each panelist said that their respective companies were actively engaged in making their services accessible to this new wave of retail investors. Larkin said that E*TRADE has invested in its mobile services to serve its growing user base of younger retail investors. “The new investors coming in, they do skew younger,” he said. “We’re now approaching about 70% of our daily logins come from a mobile device.”
Larkin said that he felt there was negative sentiment in the industry towards younger investors, many of whom get their trading advice from online forums and social media. “I think there’s this narrative that’s around these young investors. I think they stereotype this idea that young investors don’t know what they’re doing. It’s not true. This idea that younger investors don’t know how to trade things like options is reckless in a lot of ways.”
Kinahan concurred. “They have access to education at a young age that previous generations just didn’t,” he said.
Many of the panelists’ companies are attempting to make their services more accessible to younger, less experienced investors by providing free education about the options markets.
“We’re very focused on enhancing our education efforts – product innovation, product awareness – to serve retail investors,” Criqui said. “Education really is key, and Cboe has been working on more robust educational offerings to help retail participants.” Silber said that while, “I wouldn’t say we’re hashing out Black-Scholes with anyone at this stage,” Citadel was seeing more and more questions on a wide gamut of topics relevant to options trading from both retail and institutional investors, and that the company was working diligently to advise their clients.
Kinahan summed up the current state of the options markets. “Between 2013 and 2018, we were all talking about, ‘How are we going to get young people in the markets?’ And then when they all came, they all came at once!”