For exchanges, trade handlers and technology providers, the U.S. options market recently has been the equivalent to a three-star restaurant review on Yelp: the meal was okay, it had its moments and there was no big problem, but overall it wasn’t anything to get excited about.
The issues keeping options from four or five stars have been pretty much the same for several years now.
Flat volumes. A fragmented marketplace. Liquidity challenges. Subdued market volatility. Increased operating costs.
The market’s fragmentation and complexity have bifurcated liquidity. “Today close to 50% of the overall market volume is traded in the top 20 products, whereas three years ago it was more like the top 50 products,” said Peter Maragos, chief executive officer of Dash Financial Technologies.
One cross-asset trend evident in the options space is that of end users taking more control of their trading. “Buy-side traders have never been more sophisticated,” Maragos said. “Whereas ten years ago TCA reports were a ‘tick the box’ exercise for many, today most are looking to analyze full order execution reports that show not just fills but every venue that the ‘child’ slices touched along the way and the fees they incurred. Full order routing transparency is expected.”“All of this has created significant liquidity challenges for investors, but at the same time it has also created opportunities for technology-led firms,” Maragos continued. “Investors today have access to extremely powerful trading technologies and transparency tools that are fundamentally changing the way the buy side interacts with the markets. That has been a major win for investors and will only increase as more brokers adopt these technologies and business models.”
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