Institutions Boost Options Trading – Slowly

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Hedge funds, mutual funds and other Institutional buyers and sellers of options continue to trade more, and there is pent-up demand for further gains if the industry can make block trading more efficient and anonymous.

That was a key takeaway from the Wednesday morning “Institutional Perspectives on Today’s Options Markets” panel at the Options Industry Conference (OIC) in San Antonio.

The slow but steady increase in institutional options trading has been overshadowed by the spectacular rise in retail options trading in 2020-2021, and more recently the unwind that is occurring amid this year’s bear market.  

But whereas retail traders are more fickle, with a shorter attention span and less tolerance for market downturns, institutions are options-industry clients for the long haul. So brokers,  exchanges and technology providers are tuned into the challenges of these core clients.

Jason Hedberg, Global Head of Equity Derivatives Flow Distribution at UBS, said these challenges include position limits, which can be set with no apparent rhyme or reason, and reporting requirements, which can result in too much transparency.    

Arianne Adams, Senior Vice President, Head of Derivatives & Global Client Services at Cboe, cited three specific challenges: institutions need to be able to trade options at size with less market impact; a lack of flexibility in listed markets that makes traders turn to OTC markets for some exotic and complex options trades; and the complexity and operational burden of having 16, soon to be 17, U.S. options exchanges. 

“Exchanges are listening” to institutional concerns about friction in the listed options market, Adams said. Industry remedies can include a rethink of position limits, some of which may be antiquated, and better incentives for sell-side banks to post block-size quotes.

“Block trading functionality is extremely critical for this ecosystem,” Adams said.

NYSE is focusing on developing new products that will help institutional clients better trade options in size. Institutions are “hungry for what’s available on the price improvement side,” said Meaghan Dugan, Head of Product & Competitive Strategy at NYSE.

Ultimately the single biggest question for the listed options industry is “How do we give a more anonymous outlet for oversized trades?” Hedberg of UBS said. “We have to address that, along with some of the vagaries of the listed market which we don’t have a great explanation for.”