STA 2020: Post-COVID Options Volume Recovers, Volatility Lingers

Suzanne Cosgrove

Suzanne Cosgrove


When Cboe Global Markets flipped the switch on its trading floor in mid-March and temporarily moved to all-electronic trading in response to the COVID-19 crisis, it also heralded a period of change for the options industry.

“It was a big, big move to take robust open outcry trading to all-electronic over a weekend,” said Ed Tilly, Cboe Global Markets’s CEO, chairman and president, in an interview at the STA’s 2020 Market Structure Virtual Conference on Wednesday.

One change that appeared to be well-received by customers during Cboe’s temporary closure of the trading floor was the implementation of a modified version of AIM (automated improvement mechanism) for Cboe S&P 500 options (SPX). AIM offers potential price improvement through an auction process — something that became more important when Cboe went to an all-electronic format.

Traditionally, SPX tends to trade in large-size orders with more complex strategies. As Tilly put it, replicating hybrid trading of SPX is not easy on an all-electronic platform when it “comes in hundreds of thousands of flavors.”

In a later STA panel discussion, Tommy Martin, managing director and head of sales strategy and operations at DASH Financial Technologies, said, “S&P options are some of the most clunky orders there are to do” because of their complex nature. Orders are often sent to the trading floor “with the expectation that the floor broker is a backstop.”

Cboe reopened the floor on June 15, but customers asked the exchange to continue to offer the modified version of AIM, an exchange representative said. Cboe submitted a rule filing for [[|the amendment]] in June that is still pending regulatory approval.

“We never would have been able to execute for our customers during COVID-19 without the cooperation of the SEC,” Tilly said. He added that while the exchange and the regulator did not always see eye-to-eye, their relationship during the stressful period of the coronavirus “was a perfect model.” 

Martin said options spreads initially widened with the onset of the pandemic, but “the markets ended up coming back … and the S&P performed better, or at least as well” as it did pre-COVID.

Trading floors also have rebounded. Martin said activity has returned to levels close to where they were before COVID hit. But he added that recent OCC data suggests that while options volume is robust, the mix of activity has changed. “The retail experience has never been better than it is now,” but funds have pulled back, Martin said.

“Some of the more staid, passive investors are waiting it out,” said Sandor Lehoczky, managing director and principal at Jane Street. 

At the same time, a new group of investors have entered the market, said Paul Jiganti, a managing director at IMC.  The “Robinhood movement” — a reference to the commission-free online investment company — pushed markets to do better, “and capital markets have become more democratized in the process,” he said.

Lehoczky noted options open interest has not kept pace with the rise in options volume, which suggests growth in same day “in and out” trades. Is it sustainable? “I do worry about these new investors coming in,” he said.

In addition, looking ahead six months, Cboe Volatility Index (VIX) futures “suggest high levels of volatility.”  

“The VIX market suggests no one is going to sleep for a long period of time,” Lehoczky said.



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