Cboe’s Henry Schwartz Offers Keen Analysis of Industry Trends Driving Unprecedented Volume
The 2021 Options Industry Conference, held virtually this year after last year’s Puerto Rico event was cancelled amid the pandemic, kicked off with a session led by Henry Schwartz, formerly of Trade Alert. Schwartz is now a senior director at Cboe Global Markets and head of market intelligence since his firm was acquired by Cboe last year.
Schwartz ran through more than a dozen slides to start his session and then had a quick panel discussion with what he described as “three legends” of the options industry.
He was joined by Annabelle Baldwin of SpiderRock, Shelly Brown of MIAX and Jim Hyde of ICE/NYSE Options.
Schwartz’s first slide showed a quiet start to the listed options business in 1973, with trading in just four options exchanges for the first 20 years. Today, we have 16 exchanges, part of five exchange groups. When the ISE entered the picture and introduced electronic trading in the year 2000, volumes started to increase.
Volume leveled out in the industry in the mid-2000s at about 4 billion contracts, but has exploded in the last several years, driven by the rise of retail trading and an explosion of volatility during the “Volmageddon” of February 2018,” when volume jumped to 5 billion contracts. Both volume and volatility accelerated further during the pandemic in March of 2020.
Schwartz said 2020 options volume “was off the charts” and he projected the volume in the first quarter of 2021 to be about 9 billion contracts. Schwartz said “2020 was a once-in-a-career type of move for volatility,” noting an all-time high in VIX and realized volatility over 100 percent for several weeks.
The most recent growth in volume has come largely from single-name option trading and the introduction of new ETFs, he said.
Schwartz and the panel also discussed the trend in order size, noting growth in the number of orders under 10 lots and big growth in one-lot orders.
Some of these gains, the panel said, were from the way orders were being executed, noting parent orders might be larger. Big open outcry trades that would have helped larger-lot volumes were executed differently because of the closing of the trading floors or the limited capacity because of COVID when they started up again. Big block trades have been lower during 2020 and 2021 so far.
The first quarter of this year has seen trading in single name stocks “off the charts,” Schwartz said. He said the beginning of the uptick in industry volume and single-name volume specifically could be tied to the introduction of zero commissions by retail brokers in 2017.
Single-lot volume has jumped to a couple million contracts a day after zero commissions were introduced, Schwartz said.
The pandemic trading of March 2020 saw industry firm participation drop while retail trading soared.
Another trend Schwartz highlighted was the growth in listings, which ICE/NYSE’s Hyde said was driven by the introduction of SPACs and new ETFs. In the last 10 months, listings have grown from 4,200 to 4,700 options.
Schwartz said the top 100 names used to see 80% of the daily volume, but now they see just 70%. “Things have broadened out dramatically,” Schwartz said. He noted that Reddit-style single-name trading has dominated and that not to see the QQQs as one of the top-traded options was “a big thing.”
He said in the past 65% of options would not even trade 200 contracts a day in 2015, but that number has dropped to 43% in 2021.
This growth in the number of options listed, with 16 exchanges trading, is a big task for industry data providers, Schwartz said. He also said market-makers have had to trade smaller-size orders because their risk is so spread out. Hyde said the small order size is a benefit to market-makers.
Another issue he addressed was the shortening of the expirations in the options being traded, which is an issue the industry needs to look at. The large number of options listings because of weeklies and dailies is confusing to customers he said, noting there are 31 expirations for SPY.
“As weeklys have expanded and customers embraced them, half the volume is in short-dated contracts,” Schwartz said. Quarterly expirations continue to be dominated by institutional participation.
He noted the volume in the quarterlies is pretty constant, but that weeklies now represented 40 percent of the volume.
Institutional participation has also grown during 2020 and 2021, though there was a dip during March of 2020 as some firms were blown out, Baldwin and Schwartz noted. Schwartz said 2020 saw a new high in the number of market participants.
Multi-strategy funds are behind the growth in institutional participation, Baldwin said, noting growth in European funds and investor interest coming out of Asia. The increased use of options by retirement funds like IRAs also has been a contributing factor, she said.
Hyde said the options business is a “great business” and that four stocks, which included AMC and GameStop, saw a 500 percent increase in volume from the first quarter of 2020 with spreads tightening by 45 percent. “It is a retail story,” Hyde added.
Some of that trading saw customer participation as high as 100 percent of the volume, Schwartz said, noting zero friction to that trading.