TECH TUESDAY: State of the Options Industry

TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.

Growth in the U.S. options market has outpaced that of equities in recent years, and there is enough runway for that dynamic to continue for the foreseeable future.

That was the broad takeaway of the State of the Options Industry panel on day one of SIFMA’s 2024 Market Structure Conference held on November 6 in New York. Panelists were Arianne Adams, Chief Strategy Officer at Webull Financial; Greg Ferrari, VP & Head of North American Exchange Trading at Nasdaq; and Larry Tabb, Director of Market Structure Research at Bloomberg.

Ferrari noted that options trading volume has seen a 19% compound annual growth rate over the past decade, driven by increased retail participation and liquidity enablement.

“Liquidity provisioning, retail education and underlying market infrastructure are driving confidence in market quality and risk mitigation,” Ferrari said. “Overall, there is great emphasis on the good we’ve done as an industry.”

“Demand is real and continues to accelerate,” said Adams of Webull, a trading platform operator. “We are seeing more customers using options to mitigate risk and trade around events in a more precise fashion.”

Adams said retail has indeed been strong, but the market’s expansion has also included institutions trading more options, especially contracts with shorter maturity profiles.

Ferrari cited two secular trends underpinning options market growth: more ETF listings with embedded options components, and greater demand for U.S. options market access from abroad. “We see this in inbound calls asking how to participate [in options],”  he said. “Data is being consumed much more broadly.”

Bloomberg’s Tabb asked whether 18 options exchanges were too many.

Ferrari noted there are many different segments within the options market, which support a variety of exchanges. “The overall landscape is incredibly dynamic,” he said. With its six options exchanges, Nasdaq is “spending less time on fee models and fee schedules and more around the market maker experience. We are focusing on the architecture of the technology and ensuring that it meets and exceeds the needs of the market, as well as ensures confidence in the infrastructure.”

Adams commended some of the newer options exchanges for building decent market share but also said exchange consolidation would be a good idea at some point.

The panel was constructive on newer short-maturity options, including zero-days-to-expiration options (ODTEs), which have gained traction in recent years with little or no cannibalization of more traditional monthly or weekly expirations. Ferrari said 21% of options trading volume is in contracts expiring that same day.    

“The ability to take views on specific days is really important to help manage risk and to take advantage of news, information and what’s happening in the world,” Tabb said.

The panel also touched on flex options, whose share of the market has more than doubled in recent years to about 2% of average daily volume on greater demand for bespoke products; and floor trading, which has retained a critical role in the market ecosystem as a venue for complex transactions but has limited growth prospects.

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