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Listed Options Market Structure – Looking Ahead

A SIFMA Update from OIC 2024

SIFMA’s Ellen Greene moderated the panel discussion, “Navigating the Markets During an Election Year”, at the 2024 Options Industry Conference (OIC) in Asheville, NC. She also shared prepared remarks on the listed options market, including:

  • The continuation of options volume growth.
  • The interconnectedness of multiple SEC Equity Market Structure proposals, the possible trickle-down effect to options, and why many trading and exchange representatives believe that a lookback process is needed to comprehensively assess the impacts and costs.
  • Options market participation is expected to increase through investor education and better access to data and tools.

Investor-driven growth continues for listed options

The continuation of options volume growth in 2023 – an increase of 7% year over year – reflects the rising investor demand, with retail traders being a large component of this robust volume.

Total Options ADV

Through SIFMA’s recent Market Structure Survey, we have heard from the majority of listed options trading and exchange representatives that they expect the Average Daily Volume for multi-listed options to remain at 30-40 million contracts in 2024. Year to date, it is actually averaging over 47 million contracts daily.

Impact of the SEC’s proposals

The Market Structure Survey respondents also expressed concern about the SEC’s Equity Market Structure (EMS) proposals. Over 83% stated that, due to the interconnectedness of multiple proposals and their truncated timelines, a lookback process is needed to comprehensively assess the impacts and costs.

The economic cost-benefit analysis done by the SEC is based on outdated data, which was not available to commenters, despite SIFMA’s FOIA request.

The SEC’s EMS proposals are:

  • Order Execution Disclosure (Rule 605)
  • Minimum Pricing Increments (Tick Size)
  • Regulation Best Execution
  • Order Competition Rule
  • And the recently proposed Fee Tiering Rule

While most of the proposals affect equity market structure, there could be a trickle-down effect to options – especially if unintended consequences emerge from cumulative effects. Additionally, the Best Ex proposal specifically targets options, despite FINRA’s longstanding rule.

On March 6, 2024, the SEC adopted the amendments to Rule 605:

  • Order execution data will be enhanced and more reflective of current market structure. This will allow retail firms to truly demonstrate the high-quality executions that investors receive today.
  • The SEC will have better access to the data it needs, such as size improvement relative to the NBBO, to fully assess market quality.
  • These updated reports will more accurately reflect the current market dynamics and should be used by the SEC to determine whether additional rulemaking is warranted. We will only start seeing this updated reporting after the compliance date, which is over a year away.

It is crucial that we thoughtfully consider new proposals. An example of a rule proposal that needs more careful consideration, analysis, and industry input is the Tick Size Proposal. It seeks to amend the NMS rules that cover tick sizes, access fees, round lots, and the display of better priced orders, such as odd lots.

SIFMA finds the tick sizes recommended in the proposal to be too granular which, if implemented, would reduce liquidity and increase costs for investors. SIFMA’s members instead propose a half-cent tick increment for select tick constrained stocks – and they also support lowering access fee caps. It is critically important that all market participants can access the markets at a reasonable cost.

Both SIFMA and SIFMA’s Asset Management Group support the acceleration of variable round lots and the inclusion of odd-lot order information as part of consolidated market data – but have some concerns with the proposed inclusion of “best-odd lot orders” as part of consolidated market data. This is because, for the first time, investors would see a non-protected quote on the SIP. It is unclear what the impact would be on options pricing since a contract generally represents 100 shares of the underlying security.

While we support some of the Commission’s proposals, we believe others fail to identify a market failure and lack clear direction from Congress.

What’s ahead for options?

Looking ahead, we see market participation increasing through investor education and better access to data and tools.

Since mid-2023, there has been a significant increase in trading of short dated proprietary indices and ETFs. Short dated options have become attractive to investors with shorter-term time horizons. The growth of these products has contributed to the overall growth in the listed options market.

Market resiliency remains a top priority. Our listed options committee examines a wide range of issues impacting market structure, investors, regulation, and risk, and provides industry input on SEC, exchange, and OCC rulemaking – with the goal of enhancing the investor experience.

Ellen Greene is Managing Director, Equity and Options Market Structure at SIFMA. In this capacity, she is the staff advisor for both the Equity Markets & Trading Committee and the Listed Options Trading Committee. Ellen also leads SIFMA’s advocacy work on the Consolidated Audit Trail.

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