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Despite What You Read, The Options Industry Is Doing Great
Traders Magazine Online News, August 24, 2018
A recent Wall Street Journal article claims a behind-the-scenes battle in the options industry threatens investors. But the industry has never been stronger, as indicated by continued increases in volume as well as an improvement in liquidity across the market, noted TABB Group’s Russell Rhoads.
An article in the Wall Street Journal this week once again is putting a negative spotlight on the options industry (“A Messy Battle Brews in the Options Market”). The Options Clearing Corporation (OCC) is the target du jour, along with some commentary about Craig Donohue, CEO of the OCC, who has done a solid job in the role. The article even brings up how he dresses, what kind of car he drives, and that he has vanity plates. What does that have to do with the industry?
The whole article is old news. The core of the article is a lawsuit that was filed in 2016. The quotes from Craig Donahue used in the article are from last November. And a quote from the lawyer representing some trading firms and smaller competing exchanges in the lawsuit is from a letter dated in January.
The article notes that the OCC was deemed a systematically important financial institution and needed to raise capital. This was in response to the global financial crisis in 2008. What was not mentioned was that the OCC did a stellar job during the dark days of 2008. Also, the article fails to mention that the OCC has an AA+ credit rating from Standard & Poor’s. S&P even posted a notice this week reaffirming this rating. To offer some perspective, the AA+ rating is held by only 1% of the more than 9,000 entities covered by S&P. OCC is a very financially strong entity and has become much stronger under Mr. Donahue’s leadership.
The WSJ article shines a light on the OCC’s plan to boost dividends for its shareholders, the three largest options exchange operators. These exchanges collectively paid $150 million to OCC to increase its capital buffer after the financial crisis. In return, the exchanges became owners of the clearinghouse. And as owners that risked their own capital to strengthen the financial backbone of the clearinghouse, they are receiving dividends. According to the article, “Options traders say the plan could hurt investors by making it more onerous to trade and potentially crimping liquidity in the markets, affecting how difficult it is to swoop in and out of positions.” But the plan has been in place for several years and the industry has never been stronger, as indicated by continued increases in volume as well as an improvement in the liquidity across the whole options market.
[Related: “US Options Volume on Pace for Record Year Despite Drop Off, Lower Volatility in Q2”]
TABB Group estimates options volume is on track this year to exceed 5 billion contracts for the first time. Even more significant is the trend with respect to the quality of the market: The average bid/ask spread across the options industry was 0.22 in July 2018 and has narrowed each month since the market volatility in February. The last time markets were this tight (which is a good thing for traders) was in September 2013.
Bottom line: The options industry is growing, the quality of markets is favorable for traders, and the OCC is one of the most financially solid entities in the United States.
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