TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.
New products, more trading hours and technological advances are tailwinds for growth in the options market.
That was a high-level takeaway from the Listed Options day of the two-day SIFMA Market Structure Conference on November 1st at New York Law School in lower Manhattan.
First, short-dated options, which enable traders to position themselves around specific events such as an economic data release or a monetary policy decision, have been the biggest growth area within options over the past few years. The newer options contracts in certain exchange-traded funds (ETFs) and indexes are listed at least two weeks in advance of expiration, and have expirations each day of the week, as opposed to traditional expirations on the third Friday of the month.
During the event’s Exchange Leaders panel, Sean Feeney, Head of U.S. Options at Nasdaq, noted that options products need depth, continuity and liquidity; and that short-dated options provide continuity of product with non-Friday expiring contracts. “The narrative on short-dated options has shifted,” Feeney said. “There are benefits to trading options that expire on non-Fridays … We can see use cases for the expansion of these expiration cycles beyond core, broad-based indexes.”
In the subsequent Trends in Retail Trading panel, Greg Ferrari, VP of Exchange Business Management at Nasdaq, spoke to technology’s role in expanding and improving the options market.
For instance, Nasdaq offers weekly options that expire on Fridays and, more recently, introduced contracts with Tuesday and Thursday expirations to complement the existing Monday and Wednesday expirations that exist for broad-based large cap index and ETF options. Ferrari emphasized that robust liquidity in the Nasdaq-100 (NDX) and S&P 500 (SPX) ecosystems, as well as enhanced technology from the exchanges have boosted confidence and use cases for short-dated contracts.
Nasdaq is leveraging advanced technology, including artificial intelligence, to identify option strike prices that don’t trade and can give rise to market manipulation. “There’s a lot of product that doesn’t trade, which enables certain activity that we want to root out,” Ferrari said. “Collectively, as an industry, if we recognize there are bad actors in the system, we can use technology to shut these strikes down.”
Added Ferrari, “we continue to modernize the capacity and resiliency of our trading and surrounding systems, which is a likely catalyst for the market expansion.”
Additionally, markets are moving beyond trading just within the traditional 9:30 am – 4:00 pm trading day, as more venues offer 24/5 or even 24/7 trading for some of the more liquid single stocks and equity index options.
The expansion of trading hours is driven by increased demand from overseas traders, who want more access to U.S. markets.
“International interest in access to U.S. markets is a testament to the resilience, capacity and transparency of our market structure,” Feeney said. Nasdaq is “keenly looking into” how to best service increased interest in extended trading hours. Speaking from an industry perspective, he continued, “we’d be doing ourselves a disservice if we didn’t recognize this was coming.” He added that operational infrastructure both within and beyond the exchanges – i.e., market participants, the Options Clearing Corporation (OCC) and the Options Price Reporting Authority (OPRA) – would need to prepare for expanded hours.
Another growth area is FLEX options, which are customizable products where the buyer can set the terms for the contract, commonly used within option-embedded ETFs, which democratize market access by enabling passive institutional investment in what is typically an actively-traded asset class, Feeney explained.
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