(EXECUTION MATTERS is a Traders Magazine content series focused on the topics most important to traders and technologists in US equities and options markets. EXECUTION MATTERS is produced in collaboration with Lime Trading Corp.)
The US options market continues to be a dynamic growth story that has the attention of traders, brokers, trading venues, and infrastructure technology providers.
Average daily options volume reached 47.4 million contracts in September, up 7.5% from the year-prior period, according to Options Clearing Corp. data, and 2024 is on pace to be a record year. Options market developments in the news recently include an academic research report about retail options trade execution, and IEX Group’s announcement that it plans to launch what would be the 19th US options exchange.
The sustained strength in options trading has been largely driven by retail participation, which increased from about 35% of the market pre-pandemic to 40-45% since then. Post-pandemic data “suggests that substantial retail options trading is here for the foreseeable future,” Steven W. Poser, Director of Research at NYSE said in a December 2023 report.
Providers of options trading infrastructure have taken notice. “Retail is becoming smarter,” said Johan Sandblom, President and Head of Business Development at Lime Trading, an agency-only broker-dealer providing market access to the U.S. equities and options markets. “Product innovations such as shorter maturities and multi-leg orders, combined with more educated and savvier investors have contributed to the recent upswing in volume of options trading.”
“For many investors, trading options isn’t an alternative but an addition to their traditional equity portfolios,” Sandblom continued. “That is why we make it easy to trade both asset classes through a single API (application programming interface). We want our traders to be able to focus on their strategy, so we design our tech to make it easier for them to do just that.”
Options trading was a key topic discussed at the Security Traders Association’s 91st Annual Market Structure Conference, which was held last month in Orlando, Florida.
In the Listed Options: They’re Everywhere panel on Sept. 19, it was noted that in the past five years, there has been strong growth in the use of options by self-directed investors, which can be attributed both to the robust trading platforms accessible to these investors, as well as more widespread investor education. The breadth of the options trading client base has expanded, and clients are increasingly trading in all market conditions.
With regard to the options market ecosystem and operational complexities, the panel noted that there is a network of market makers who make continuous, two-sided quotes in one million instruments across 18 exchanges; a community of prime brokers who provide financing; and sophisticated electronic brokers that provide efficient, low-cost market access for retail and institutional clients.
As for what’s next, the panel cited short-dated options on single stocks, as well as expanded trading hours are on the horizon. The market moves fast and the evolution of options is moving fast as well, panelists said; in the near future it might make sense to slow down new initiatives to ensure the proper infrastructure and protections are in place.
The options market was also discussed in the Continued Democratization of Retail Investing panel at STA on Sept. 18. That panel noted that innovation in the options market has been a significant factor in improving the retail trading experience, and the industry needs to meet the continued demand for short-dated options and expanded trading hours in order to sustain that momentum.
Looking ahead to potential market volatility from the upcoming election and changes in federal rates, growth in retail investing will undoubtedly play a critical role in shaping how traders adapt and thrive in this evolving landscape.
