The U.S. Securities and Exchange Commission is moving forward with a lighter touch on the regulation of markets including options, which hopefully will provide a foundation for the next leg of options growth.
That was a broad, connect-the-dots takeaway from the two Tuesday afternoon panels at the Options Industry Conference in Palm Beach Gardens, Florida.
Regulation
A ‘Fireside Chat’ in South Florida is almost assuredly a misnomer, but the OIC opening panel provided some regulatory warmth.
Jamie Selway of the U.S. Securities and Exchange Commission said the regulator’s overarching principle is engagement with the industry, with the aim of collaborating to make markets more competitive, drive efficiencies for brokers and exchanges, and enable innovators to bring new and beneficial products.
In a discussion with Stephen Luparello, Chairman at The Options Clearing Corporation (OCC), Selway said the Paul Atkins-led SEC is returning to its long-term norm after four years of mostly not engaging with the industry.
Digital assets market development is an important area. The SEC is utilizing exemptive relief to help startups, but its credo is “innovation without arbitrage” which means legacy market participants will have the same benefits and a level playing field to compete with newcomers.
Selway addressed ongoing harmonization efforts between the SEC and the CFTC, noting that a broad aim is to have market participants and operators not be able to discern much difference between how the two regulatory bodies operate.
Regarding the options roundtable held last month, Selway cited the following as interesting discussion topics: execution quality disclosure for retail traders, the state of same-day expiry options (0DTEs), and penny-trading and auction market structure mechanisms.
Broadly speaking the SEC would like to support and assist market development, without the need for formal rule-making.
Lastly Selway said 24/5 trading can be additive to US market liquidity especially if overseas corporations trade US overnights along with retail, and rapid changes in the marketplace are increasing the need for investor education.
State of the Industry
Henry Schwartz of Cboe Global Markets presented his annual “State of the Industry” data deep dive Tuesday afternoon at OIC, with color commentary provided by Geralyn Endo of MEMX, Annabelle Baldwin of SpiderRock, and Shelly Brown of MIAX.
Taking a long look back at options volumes, Schwartz noted that the first 25 years had negligible volume compared with current levels. Market automation boosted volumes in the 2000s; a flattening in the 2010s was followed by a boom during the pandemic of 2020-2022, fueled by zero commissions – that boom continues today.
Schwartz projected 2026 volume to be 17.5 billion to 18 billion contracts, compared with around 4 billion contracts per year pre-Covid. Flex options are the fastest growing area within options, at about 36%, followed by index options and ETFs at 25%. Single-stock options were the darling of the pandemic but growth has slowed to 2%.
Aside from exogenous factors such as Covid, low interest rates, and higher market volatility, The panel noted that long-term growth of options has been supported by industry advances such as the electronification of markets, the emergence of displayed quotes, and multiple listings across exchanges.
To the age-old question of whether there are too many options exchanges? Brokers say yes; exchange operators note that all venues have unique market models that bring something new to the industry.
Interestingly, the number of options trading floors has crept up to six in recent years– technology has been a big factor for this mini-renaissance, providing floor brokers with better functionality and more efficient operations along with less risk.
To the question of whether having 2.2 million options in the marketplace means there’s too much product, it was noted that there’s a good amount of wasted bandwidth and the industry can do a better job of managing strike listings.
The universe of independent options market makers has shrunk over the years, which was noted as a natural consequence of higher costs in a very capital-intensive business. Gone are the days where a small firm could rent a seat on an exchange and make markets on a shoestring.
Lastly the trend toward shorter-dated options was discussed, Panelists noted that there are more risks associated with shorter expirys, but without risk there would be no industry growth.
