A US economy diverging from expectations and a contentious presidential election are among factors that will likely increase market volatility in the second half of 2024.
That was a view expressed on the “Market Landscape: Where We Are and What is Next” panel Tuesday afternoon at the Options Industry Conference in Asheville, North Carolina.
Panelists noted how the economic landscape changed from early 2023, when expectations were for a recession and interest rate cuts from the Federal Reserve, to now, when inflation is creeping back up.
“Everybody crowds to one side of the boat or the other, and there is a huge recency bias,” said Steve Sosnick, Chief Strategist at Interactive Brokers. “At the end of 2022 there was going to be hell in a handbasket. Coming into this year, everything was good and people were expecting a soft landing and rate cuts…But that is a mutually exclusive combination.”
“Now there’s starting to be a worry about stagflation, as there are weaker economic prints at the same time that inflation is not cooperating,” Sosnick said. “That will be a theme going forward.”
Patrick Zielinski, Chief Executive Officer, BOX Options Exchange, noted that markets have thus far been able to digest the shifting winds, as evidenced by low volatility readings, but that may not last. “The status quo could change” in the second half of the year, Zielinski said, adding that options can help investors manage that risk.
Meaghan Dugan, Head of Options at NYSE, said that options markets have grown in recent years, buoyed by technological advances and strength in underlying equity markets. Regarding 2H 2024, Dugan noted that based on historical patterns, even if volatility surges in the fall, the markets should resume a growth path post-election.
Exchange operators can be agnostic about market direction; they just need to enable traders and investors to express their opinions. “We need to provide transparency, resilience and stability in markets, and to be there every day,” Dugan said.
In the previous “State of the Industry” panel, Henry Schwartz, Vice President and Global Head of Client Engagement at Cboe Global Markets, noted that options trading volumes have more than doubled since 2019. That’s enough to support the current infrastructure of 17 options exchanges run by six operators.
“All the exchanges are doing some visible activity and meeting some need in a very competitive space,” Schwartz said. “Yes, it makes it more complicated and tricky for liquidity providers, but we’ve been meeting the challenge. I remember when we used to discuss whether six exchanges is too many.”
Retail trading has been the hottest topic in options markets, and it now represents as much as half of order flow, up from 10-15% years ago.
With regard to what exciting developments lie ahead, Schwartz first mentioned extended trading hours. “It seems to be coming together…As you see more overnight equities trading, you’ll see more ability for options to trade.”
He also cited the quoted spread book concept, which will enable options market makers to dynamically quote complex orders, and cross product spreads, which allows for trading one options product against another. “There is a confluence of things that people trade that are obviously interconnected, but are not yet officially connected in the market,” Schwartz said.
Sosnick of Interactive Brokers said a trend to watch is the “continued compression of the expiration cycle,” and how and when this will filter down to single stock options. “We all get paid on volume, and this is an obvious place to look for volume.”
