Henry Schwartz, president of Trade Alert, gave his annual “State of the Options Industry” address at the Options Industry Conference in Scottsdale, Arizona, and painted a more optimistic picture than recent portrayals in the press.
Yes, options volumes for 2017 are predicted to be flat to slightly up, a bit more than 4 billion contracts, but to Schwartz, that is a good number given the lack of volatility.
Another positive is that more institutional users are appearing in the options market. According to his calculations based on regulatory filings, some 100 institutions enter options markets annually while 85-90 drop out.
But there are obvious concerns and they are well documented — fragmentation, widening spreads, lack of transparency on the screen, huge number of strikes to quote, increased competition and costs (data, technology, exchange connections) to maintain a business.
Options Industry by the Numbers
Schwartz’s presentation was data-centric, so here are some notable stats.
Market share based on fee structure breaks down as: 55 percent payment for order flow, 43 percent maker-taker and 2 percent hybrid.
As pertains to market makers, Susquehanna holds 15 percent of options open interest based on Q4 2016 data. The top 10 market makers represent 50 percent of the open interest and the top 35 represent 80 percent of the open interest. To him, that is a decent amount of diversity despite the industry angst over the shrinking number of market makers in the space.
Regarding the approximately 900,000 strikes on some 4,300 underlyings, Schwartz suggested delisting the 1,000 underlyings with the least overall activity.
Options on ETFs are expected to grow by 4.22 percent in 2017. Overall growth of options volumes over the last 10 years is 2.74 percent.
There are seven maker-taker exchanges — three at Nasdaq, two at CBOE, NYSE Arca and MIAX Pearl. Schwartz doesn’t see the need for multiple exchanges with the same model, though his sentiment was immediately disputed by the exchange leader panel later in the morning.
In terms of premium received from selling options, SPX options represent 45 percent of daily premium. Weeklys represent 35 percent of the average daily volume. Complex orders are 65 percent of ISE’s volume, 44 percent of PHLX’s and 43 percent of CBOE’s.
Most risk and premium transfer within the marketplace is between and among insurers. Of written P&C premium in the US (about $600 bn), nearly $415 bn of that is reinsured. Big boys providing liquidity, does not strip the benefits of that liquidity from the little guy.