Time for brokers to add options trading as volumes explode on high volatility

“Usually, adding options to the typical CFDs and equities offering leads to fragmentation of the platform technology as many brokers will need additional back-end and front-end components, and that could be an important barrier for them. Apart from that, legal hassle and costs associated with proper licensing of market data could be a barrier at first. We are seeing this trend among market data vendors and exchanges to make it easier and more affordable.”

The World Federation of Exchanges (WFE) has just published its FY 2022 Market Highlights report that can be summed up in two takeaways: $25 trillion was wiped off global stock markets in 2022 due to a perfect storm of negative pressures and the pronounced increase of options trading.

We will be focusing on the latter as the CBOE equity put-call ratio, which is a reflection of options trading volume, continued to print new record highs, caused in part by traders’ growing reliance on options to speculate on movements in stocks, or to hedge their positions.

In January, Cboe reported total options volume at 3.4 billion contracts in 2022, the third consecutive record-breaking year.

Options trading volumes up despite a $25 trillion drop in global stock trading

Volatility plays a big role in the rise of options trading, especially among institutional traders. Sometimes investors use these derivatives to hedge: an options contract can be used as an insurance policy in case an asset falls in value, for example. Options also are a cheap way to speculate.

But even if it doesn’t destabilize financial markets, the options boom risks burning armies of new traders when equity markets eventually change direction and US stocks finally cease setting new record highs. That could leave a new generation of investors sour on an important wealth generator.

Over the last few years, the retail segment has gotten on board with options trading, which was noticed during the meme stock craze led by the /WallStreetBets subreddit and other social media influencers. Its similarity to binary options, offering users a way to bet on the markets, can’t be ignored.

Why are global brokers lagging in pursuing the opportunity of options trading?

Attractive to both the institutional and retail segments, options trading was, however, not that accessible to the global financial markets. Until now. Earlier this month, Cboe Global Markets launched consolidated, real-time U.S. options pricing through a single market data feed.

The Cboe One Options Feed publishes aggregated BBO of all displayed orders for securities traded on Cboe’s four options exchanges as the largest U.S. options exchange operator aims to meet investor demand for a cost-effective alternative to existing offerings.

The four U.S. options exchanges – the Cboe Options, C2 Options, EDGX Options and BZX Options Exchanges – together account for approximately 31 percent of all U.S. options trading volume and, collectively, can provide a representative view into U.S. options trading.

If the rise of options trading is not news, why have many global brokers been lagging behind when it comes to adding options to their product offerings? FinanceFeeds spoke with Roman Nalivayko, CEO of TraderEvolution Global, to get the perspective of the technology vendor.

TraderEvolution Global Limited is a software development company located in Ireland and specialized in trading platform development for brokers and banks. The company provides brokers with multi-market trading software to offer stocks, ETFs, futures, options, FX, CFDs and crypto.

“The reason for slow adoption of options trading could be the fact that setting up a proper infrastructure may look difficult for many brokers.

“Usually, adding options to the typical CFDs and equities offering leads to fragmentation of the platform technology as many brokers will need additional back-end and front-end components, and that could be an important barrier for them.

Apart from that, legal hassle and costs associated with proper licensing of market data could be a barrier at first. We are seeing this trend among market data vendors and exchanges to make it easier and more affordable.

To help address those issues we designed TraderEvolution to be a universal multi-asset solution which can serve a number of exchange-traded and OTC assets including options. With TraderEvolution as a core solution brokers could broaden their product portfolio without multiplying platform solutions into an inefficient ‘zoo of platforms’. On the other hand, we work closely with market data vendors to make market data subscriptions and usage more automated, easier to handle, and report for brokers.

Single stock and index options popular in Americas, FX options popular in APAC

Available for free, the WFE’s FY 2022 Market Highlights report may provide enough data to make a broker’s mind up about providing (or not) their users with access to options trading. And because an image is worth a thousand words, we leave with the following charts covering single stocks options and index options (popular in the Americas), and FX options (popular in APAC region).

 

Financefeeds.com