36 South Breakfast. Profile of the U.S. Listed Equity Options Market. Zurich October 23, 2013

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1 36 South Breakfast Profile of the U.S. Listed Equity Options Market Zurich October 23, 2013

2 The Options Industry Council (OIC) Gary Delany

3 Disclaimer Options involve risk and are not suitable for everyone. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies have been provided for you today and may be obtained from your broker, one of the exchanges or OCC, One North Wacker Drive, Suite 500, Chicago, IL or call OPTIONS or visit For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations, or margin requirements, which are factors that may significantly affect the economic consequences of a given strategy. An investor should review transaction costs, margin requirements and tax considerations with a broker and tax advisor before entering into any options strategy. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and education purposes and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities. LEAPS, a registered trademark, Long-term Equity AnticiPation Securities SM, Weeklys SM and Quarterlys SM are servicemarks of the Chicago Board Options Exchange, Incorporated. Copyright The Options Industry Council. All rights reserved.

4 U.S. EQUITY OPTIONS MARKET STRUCTURE

5 12 Exchanges, 1 Clearing House

6 Millions of Contracts Time Line (2013) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,

7 Role of the OCC Issuer and guarantor Stands between parties to a trade, stepping in to guarantee performance on a transaction if either clearing member defaults Option Seller Margin Clearing House Option Buyer Premium

8 EUROPEAN HEDGE FUND USAGE OF U.S. EQUITY OPTIONS

9 Business Evolution Regulatory, Perception, and Technology Changes Hedge Funds, Asset Managers and Prop Desks New strategies using ultra low latency Sophisticated portfolio management - hedge / enhance returns Options traded as an asset class Algorithmic trading Pension Fund Managers Restrictions to options use is reduced

10 European investors account for estimated 10% of total U.S. listed options trading in 2010 Hedge funds domiciled in Europe represent the largest source of demand for U.S. listed options. Proportion of US Listed Options Order Flow Originating from Europe - Small- to medium-sized funds without a U.S. presence. - Trading around corporate events and volatility. Private wealth accounts are a growing source of order flow. - High levels of U.S. equity exposure. - Focus options strategies on risk management and premium generation Source: TABB Group

11 European investors account for 46% of total foreign holdings of U.S. equities Europe compared with Rest of World (excluding U.S.) Canada $297.7 Billion Europe $1.3 Trillion Caribbean $414.4 Billion Asia $648.0 Billion Latin America $53.0 Billion Other $92.9 Billion Source: TABB Group

12 Total Participation in U.S. Options Market by Segment in 2012 Asset managers 13% Retail investors 16% Market makers 48% Hedge funds 23% Source: TABB Group

13 MARKET QUALITY

14 Contrasting Growth Rates U.S. - Europe

15 Value of Trading in Selected US & European Listed Options S&P 500 Index Options (SPX) $24.9 Euro Stox 50 $10.8 DAX NASDAQ 100 Index OTC European Equity Linked Options FTSE 100 Russell 2000 Index (RUT) OTC European Equity Linked Forwards and Swaps CBOE Volatility Index (VIX) $2.6 $2.2 $1.9 $1.6 $1.5 $0.9 $0.2 US Listed Options European Listed Options OTC Equity Linked Instruments (Outstanding at June 2012) $US Trillions Source: BIS, Exchanges, Futures Industry Association, TABB Group estimates Source: TABB Group

16 Some 2012 Volume Detail 8 of the 10 most actively traded options were ETF or Index options Vanilla options: 57% of total equity options trading ETF options: 35% Index options: 8%

17 Spreads are Tightening

18 Trading is More Concentrated

19 Penny Pricing: Percent of Total

20 Penny Pricing: Tight Spreads Source: ISE

21 Penny Pricing: Liquidity Source: ISE

22 Liquidity Providers Typical market maker and prop shop participants include: Bank of America BNP Paribas Citadel Citigroup Goldman Sachs IMC KCG Morgan Stanley Optiver RBC Susquehanna Timber Hill Note that no recommendation is made with respect to the use of any firm.

23 Tools Vanilla options ETF options Index options Weekly options LEAPS Super LEAPS Flex Options

24 U.S. OTC Equity Derivatives Clearing Initial launch to support OTC equity index options dealer-to-dealer trades, followed by dealer-to-client trades soon after The first time central counterparty clearing will be available for OTC equity index options OTC trades sent to OCC for clearing will follow OCC s existing clearing, settlement, and risk management processes Currently testing with proposed participants and MarkitSERV, trade source and middleware provider OCC awaiting U.S. regulatory approval.

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