US options industry leaders wrestle with constraints on growth 

Longer trading hours could boost trading but also operational burden 

14 May 2024


Senior executives in the US options industry are riding a multi-year wave of higher trading activity, driven by the influx of a new generation of individual traders, a reduction in the cost and complexity of trading, and an expansion in the range of options available for trading.  

Average daily volume across all US options exchanges jumped from 29 million in 2020 to 43 million in 2023 and so far, this year has been averaging 46 million per day, according to Henry Schwartz, an expert on industry trends who is the global head of client engagement, data and access solutions at Cboe.  

The notional value of trading has risen even faster, going from $875 billion per day in 2020 to $2.1 trillion per day in 2023 and $2.7 trillion per day so far this year. The same with open interest – Schwartz estimates that the notional value of open positions has averaged $616 billion per day so far this year, up from $480 billion in 2023 and $280 billion in 2020. 

While that is great news for brokers, exchanges and other market participants that facilitate those customer flows, one of the key challenges faced by the industry is managing that growth. Investors are flocking to so-called "zero day" options, putting pressure on exchanges to introduce more expirations. And investors are calling for longer trading hours so they can trade in the evenings and on weekends.  

Both trends could lead to further growth in trading volumes, but at a cost. Industry executives warn that longer trading hours will increase the operational burden on brokers, clearing firms, market makers and exchanges. The same challenge arises with adding more expirations to support the zero day trend; the industry is already dealing with a huge number of contracts and adding more will put further strain on its capacity.  

Longer hours for single stock options? 

Speaking at the annual Options Industry Conference on 2 May, Shelley Brown, an executive vice president at MIAX Options, and Sean Feeney, head of US options at Nasdaq, stressed the need for a careful consideration of both the costs and the benefits before a further expansion in the range of products available for trading. They also urged regulators to allow the options exchange community to work together on collective solutions to increase the capacity for growth.  

For example, both exchange leaders suggested that extending trading hours might not be worth the operational burden.  

The US market for single stock options currently closes in the afternoon, but some market participants are calling for extending the trading day so that investors have access to those options around the clock.  

This is especially attractive for investors in Europe and Asia Pacific who would like to trade options on US stocks during their working day. It also reflects a generational shift in attitudes towards trading, especially among younger market participants who engage with financial markets through online trading apps and social media.  

Kevin McCarthy, chief administrative officer and head of clearing at Clear Street, an independent prime broker founded in 2018, pointed out that the crypto markets operate on a 24/7 basis. Speaking alongside the exchange leaders at the OIC conference, he acknowledged the operational issues created by a longer trading day, but he noted that many retail customers in the options markets also trade crypto and have become accustomed to that level of availability. 

The two exchange leaders cautioned, however, that extending trading hours would bring practical challenges for brokers, market makers and exchanges that have to process trades, handle corporate actions, update price quotes and keep the markets operating. Nasdaq's Feeney said the industry needs to consider "all the downstream ramifications" of moving to 24-hour trading day, five days a week.  

Brown echoed this sentiment, saying that extending the trading day introduces additional "operational cost and risk." He said MIAX would be in favor of such a move only if it generated additional volume. "If it is simply taking existing volume and spreading it out over time, that makes no sense," he said.  

Too many strikes? 

Another constraint on growth is the overabundance of options listings. The total number of options classes has grown from 4,000 to nearly 6,000 in recent years, and the number of strikes has almost doubled, Brown said. But many of those options do not trade at all, and that puts a burden on the firms that need to list these contracts in their systems and for the market makers that need to post quotes for these contracts.  

Andrej Bolkovic, the chief executive officer of the OCC, has a bird's eye view of the problem. As the head of the clearinghouse that processes all the trades executed on US options exchanges, he can see which contracts are active and which are not. Speaking at the OIC conference, Bolkovic said there is no open interest on 30% of the single stock options strikes, 50% of the index option strikes, and 60% of the ETF option strikes. All those contracts must be listed, however, and all the prices on those contracts must be updated continuously. "That is obviously a tax on capacity," he said. 

Feeney agreed, saying that the industry faces an "optimization problem" and should limit the number of strikes with zero open interest. The challenge, however, is that the exchanges are legally prevented from coming together and agreeing on which strikes to list.  

In 2000, the four main options exchanges then in operation settled charges brought by the US Justice Department that they colluded on listing rights. Since then, they have not been able to talk to each other about which contracts to list, and that has led to a classic prisoner's dilemma – each exchange has an incentive to match the others in new listings even though they recognize that the overall outcome is worse than if they cooperated.  

Both Brown and Feeney called for regulators to address this issue and help the industry manage the listing process more efficiently. "We need the regulators to step in and allow the exchanges to sit down and do what's right for the industry," said Brown. Feeney agreed, saying that the proliferation of strikes is "an industry problem, not a competitive problem." 

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Source: Cboe 

Trading floors – back to the future 

Although most options trading is electronic, there is still demand for the old-school style of trading on exchange floors, where market makers and floor brokers meet face to face. Brown noted that the handful of remaining exchange floors were closed during the Covid pandemic, but when they reopened, the trading volume came back. In fact, MIAX is now planning to open its own trading floor in Miami. Brown said his company is excited to finally have its own open outcry exchange and has been getting a lot of interest from firms.  

Cboe began in 1973 as an open outcry exchange, long before trading moved to screens, and has maintained a floor ever since. Today most of its trading is electronic, but in 2022 it recommitted to the open outcry model, opening a new trading floor at its original location in Chicago. According to an article in Crain's Chicago Business in March 2024, Cboe's floor has 300 traders that execute 20% of the volume in its SPX options and 45% of the volume in its VIX options. 

Nasdaq also maintains a trading floor at its Philadelphia location. Feeney noted that trading floor volume has not grown much over the years, but it has not disappeared either. He explained that the volume typically comes from banks that are hedging risks from their over-the-counter options trades. Those trades tend to be more complex trades and "strategies" that involve more than one leg, rather than outright trades in a single instrument.  

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Source: Cboe 


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