Nasdaq leads the options trading boom

Darren Sinden

As we noted yesterday one of the big winners in 2020 was the listed options market and in particular the growth in trading options on single US equities. The market got a boost from an exponential growth in retail trading accounts. Robinhood, for example, was said to have picked an additional three million new customers […]

As we noted yesterday one of the big winners in 2020 was the listed options market and in particular the growth in trading options on single US equities.

The market got a boost from an exponential growth in retail trading accounts.

Robinhood, for example, was said to have picked an additional three million new customers in 2020 and also from the activities of Japans SoftBank. Which sunk billions of dollars into US equity options in the second half of 2020, though largely without success, if that’s measured in terms of profitability.

Details are now beginning to emerge about who were the winners from that boom in options trading and it’s the Nasdaq exchange that has come out on top. Nasdaq processed more than 365 million options trades and 2.58 billion options contracts in 2020 according to data it released yesterday.

That trade facilitation involved the passing of 8.88 trillion messages and helped to make 2020 the most active year for options trading since the contracts were introduced in 1973. What’s more, options volumes rose by a remarkable 52% over the levels recorded in 2019. Nasdaq was the top options trading venue, in terms of volume, for the 11th year in a row.

Nasdaq are justly proud of their achievement and Greg Ferrari, Vice President and Head of Nasdaq Options was quoted as saying that: “The increase in options trading demonstrated to all market participants how Nasdaq technology enhances the price discovery and risk transfer process to meet their investment objectives.”

Retail traders used a number of trading strategies to drive the growth in options trading these included stock replacement, yield enhancement and portfolio protection according to Nasdaq research.

Those same retail traders also embraced shorter-dated weekly options. The sharp increase in the use of short term trading contracts has drawn criticism from Walls Street professionals because such short-dated options have no time value and are therefore dependent upon their intrinsic value. The degree to which they are in or out of the money, and the level of volatility in the underlying, for their valuation.

Options have a finite life of course and many weekly options will expire worthless as a result. In which case an investors entire stake in the position is irrevocably lost. However, the risks involved have obviously not deterred the new generation of US day traders.

Another beneficiary of the renaissance in options trading has been the OCC (formerly known as the Options Clearing Corporation) which is one of the world’s largest derivatives clearing organisations. Over the course of 2020, OCC cleared 7.47 billion options contracts breaking its previous record set in 2018 for 5.14 billion options contracts cleared.

OCC’s volumes were also up sharply when compared to 2019s totals, jumping by 51.20% in terms of total derivative contracts cleared. Whilst the number options contracts cleared by OCC in 2020 rose by 52.40% over the previous year.

John Davidson, OCC’s Chief Executive Officer said that: “Our performance during 2020’s unprecedented markets underscores how industry utility central counterparty clearinghouses like OCC benefit the investing public by underpinning markets, promoting stability and market integrity.” He added that “We remain committed to delivering efficient and effective clearance, settlement and risk management to our participating exchanges, clearing member firms and market participants”

Will the heightened demand for equity options trading continue in 2021? It’s far too early to read anything into January’s trading data. However, 2020 finished on an upbeat note and December represented the busiest month in OCC’s history with more than 756 million contracts cleared which was 80.90% higher than the numbers from the same month in 2019 and that could well be a good omen for the year ahead.

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