US Listed Options Trading State of the Industry 2014

Transcription

1 STA Market Structure Conference October 2, 2014 US Listed Options Trading State of the Industry 2014 Andy Nybo Principal, Head of Derivatives Research TABB Group

2 Listed option volume has seen recent strength after suffering through the summer doldrums and with rising volatility Average Daily Trading Volume in Period (Millions of contracts) Jan Feb Mar Apr May Jun Jul Aug Sep Note: All amounts in millions of contracts Source: OCC, TABB Group estimates 2

3 2014 volume is on pace to reach the second highest level on record Annual US Options Trading Volume 2000 to 2014P Key Drivers Demand for index and ETF products 2000 to 2014 CAGR: 14% Billions of contracts Strong growth in weeklies Return of the retail investor Insatiable demand for volatility exposure Volume by type of option 2014:H Index 10% Single Stock 56% ETF, 35% Source: OCC, TABB Group estimates Source: OCC 3

4 The question remains how much volume returns when volatility reverts back to historical levels Jan-00 to Sep-14 Average VIX:

5 US options liquidity is highly concentrated in large cap names with a growing proportion of trading occurring in short term expirations Concentration of Liquidity by Volume Tier 12% 9% 9% 9% 8% 7% 8% 8% 26% 12% 21% 30% 23% 23% 22% 10% 11% 11% 22% 21% 22% 35% 36% 36% 20% 21% 21% 21% 10% 11% 10% 10% 22% 22% 21% 19% 40% 39% 40% 41% :H1 Top 10 names 11 to to to and above Liquidity in US option markets is concentrated, with 71% of trading occurring in the top 100 names Index and ETF options dominate most active symbols Most active single stock names include large cap companies and story stocks Weekly expirations a growing part of the market Source: OCC,TABB Group estimates 5

6 Volatility events drive ETF & index trading; volatility products have become a key part of the asset class Index and ETF options account for a growing share of total volume. 7 of top 10 most actively traded options are index or ETF products Represent 82% of top 10 volume Favored product for investors seeking to hedge sector exposure Top Ten Options Traded by Volume Volume Rank Symbol 2014:H1 2013:H1 1 SPY 282,274, ,179,685 2 SPX 102,838, ,013,756 3 IWM 87,650,888 72,904, Trading in Active ETF and Index Options Average monthly volumes In millions of contracts 2011 US Downgrade Anything volatility 2008/2014 EM volatility 4 VIX 85,601,020 73,023,288 5 QQQ 68,008,220 46,747,383 6 AAPL 63,693,105 72,758,451 7 FB 49,844,335 30,111,207 8 EEM 45,018,232 39,661,468 9 VXX 38,780,641 42,669, BAC 37,591,492 49,155, Financial crisis - SPY SPX VIX EEM VXX XLF FXI EWZ :H1 State Street S&P 500 ETF CBOE S&P Index CBOE VIX Index ishares Emerging Markets ETF Barclays S&P Volatility ETN State Street Financial ETF ishares China ETF ishares Latin America ETF Source: OCC, TABB Group estimates 6

7 as evidenced by seemingly insatiable demand for direct volatility exposure The use of US listed options as part of volatility strategies has grown considerably. Increasing liquidity in listed markets is attracting greater interest OTC volatility products are important but investor preference is shifting toward listed products The two most active volatility options represent $2.1 billion in daily notional value traded High volume days exceeding $5 billion notional traded Average monthly volume (millions of contracts) Barclays ipath S&P 500 VIX ST Futures ETN (VXX) Open interest: 4.2 million contracts Average daily trading volume: 312,000 Average daily notional value traded: $1.2 billion CBOE Volatility Index (VIX) Open interest : 7.5 million contracts Average daily trading volume in 2014: 690,000 Average daily notional value traded: $937 million VIX Source: CBOE, OCC, TABB Group estimates VXX 7

8 Weekly options continue to grow in popularity; more expirations and symbols support the growing share of volume Volume of Options with Weekly Expirations Weeklies now have 5 consecutive expirations 391 symbols available for trading 30% 25% 20% 15% 10% 5% 0 0% Weeklys Volume (Left Axis) Weeklys as a % of total volume (Right Axis) Source: OCC, Hanweck Associates, TABB Group estimates 8 9

9 Market makers are integral to liquidity in US options markets but face challenges even as investor demand continues to expand Trading in US Options Markets by Type of Account 45% 47% 48% 48% 46% Market Makers Costs continue to rise; technology & regulatory costs a growing burden Asset Managers Real money accounts see rising adoption but want block liquidity 30% 32% 30% 28% 30% Hedge Funds Lower participation: flat vol restricted opportunities; broker discretion hurting demand as opportunity returns 22% 20% 22% 24% 24% Retail Institutional Market maker Source: TABB Group estimates, OCC Retail Investors Retail a significant bright spot; sophistication continues to grow 9

10 US options market complexity provides benefits in terms of innovation yet liquidity is increasingly fragmented Exchange Market Model Trading Model Pricing Model BATS US Options Exchange BOX OPTIONS EXCHANGE Price/time Electronic Maker/taker Price/time Electronic Taker/maker & traditional CBOE Pro-rata Hybrid Traditional CBOE C2 Price/time Electronic Maker/taker ISE Pro-rata Electronic Maker/taker & Traditional ISE Gemini Pro-rata Electronic Maker/taker and Traditional ISE Mercury??? MIAX Options Pro-rata Electronic Maker/taker & Traditional NASDAQ Price/time Electronic Maker/taker NASDAQ OMX BX OPTIONS Price/time Electronic Maker/taker & Traditional NASDAQ OMX PHLX Pro-rata Hybrid Maker/taker & Traditional NYSE AMEX OPTIONS Pro-rata Hybrid Traditional NYSE ARCA OPTIONS Price/time Hybrid Maker/taker & Traditional Source: Exchanges, TABB Group 10 19

11 with investors beginning to question how much liquidity is truly available in the market 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% OMX PHLX NYSE Arca NSDQ NOBO MIAX ISE GEM C2 CBOE BOX BATS AMEX Source: OCC, TABB Group 11 20

12 A look ahead Volatility is beginning to return which is contributing to rising volume Geopolitical tensions, shifts in Federal Reserve policies and economic weakness means increases in volatility are a foregone conclusion Foreign demand to manage exposures will continue to grow However, sustained levels of higher volatility will negatively impact retail demand Market complexity is here to stay; the greater dependence on technology is both the problem and solution Standards need to be adapted and followed when systems fail Benefits need to be measured against costs However, investors are beginning to question the challenges of more complexity Key obstacles to growth include tax and regulatory policies Financial transaction taxes targeting the deep pockets of Wall Street Tax reform proposals will have unintended consequences Equity market structure debate will ultimately filter down to derivatives 12 25

13 STA Market Structure Conference October 2, 2014 US Listed Options Trading State of the Industry 2014 Andy Nybo Principal, Head of Derivatives Research TABB Group