CHICAGO – Believe it or not, 2012 was the second best year for options markets, in terms of volume, noted Ed Boyle, senior vice president of business development at the BOX Options Exchange.
Last year, 15.9 million contracts traded every day, according to statistics released January 2 by the Options Clearing Corporation. That was down from 18.1 million in 2011.
But that was the industry’s peak year. And, if 2013 has started out at 17.5 million contracts a day, Boyle pointed out at the Security Traders Association mid-winter meeting here that this still is historically high.
But, he noted, intraday swings in prices – the volatility – averaged about 9%. That can be hard on market makers.
‘’We’re entering a new volatility regime that will be a low-volatility regime,” like after the dotcom bubble burst in 2000, said Denis Medvedsek, head of options market making at Knight Capital Group.
In this case, volatility continues to subside as the effects of the 2008 financial crisis wear off.
On October 20, 2008, the value of the Chicago Board Options Exchange’s Volatility Index stood at or near an all-time hire of 79.13.
On January 24, 2013, the VIX stood at 12.63, its lowest level since the crisis, as Boyle pointed out.
“It is a low-volatility, low-volume environment,” said Patrick Hickey, head of market structure at Optiver. “Not much surprise there”
Holding back activity is a lack of direction on federal rulemaking and economic policy, he said, as the U.S. government, for instance, still hasn’t resolved how it will deal with its burgeoning debt, now over $16 trillion.
“There’s still not enough certainty for people to have confidence and get excited about entering the market,” he said. “They still have the feeling that the rules might change the next day,” and that, if an institution has tried to get smart about the market and get involved, “they might have done all this for naught.”
New products, such as weekly versions of the volatility index, can bring new volume, said Sean Haggerty, associate director of Susquehanna Investment Group. Indeed, the VIX itself continues to set volume records for the CBOE.
“Too bad I didn’t create the VIX,” said Haggerty.
Mutual funds and other institutional players also have started to come into the market, which can be a key source of new volume, Boyle noted.
After the dotcom bubble burst, electronic trading was what brought great increases in volume, Medvedsek noted, both in equities and options.
“But I don’t think there’s going to be that increase of volume this time around,” he said.
“The story is not that overcomplicated,’’ said the Knight market maker. “Whether market makers and other participants prosper in 2013 is “the story of volumes and volatility.’’
Obviously, he said, “market makers tend to make more money when volatility is high and our business is also driven by volumes.’’
