Market Structure Week Debrief, 2019

Highlights from SIFMA’s 2019 Listed Options Symposium and Equity Market Structure Conference

On September 18 and 19, SIFMA hosted our annual Listed Options Symposium and Equity Market Structure Conference, respectively. With 150 people in attendance at each event for panels and speeches, we gained insights into top-of-mind topics for market participants. Inside this debrief, we recap just some of what was seen and heard, including speaker and panel highlights, volumes and market share updates.

Listed Options Symposium Highlights

Strike Listings – Market participants continue to express concerns about the number of strike listings in the options market. There are over 1 million strike listings, on over 4,000 underlyings, yet trades occur in only 10% of these on a daily basis (open interest >50%). We polled the audience at the conference, and, unsurprisingly, a solid majority agreed that there are too many strikes, 79%. While the audience split on whether strike listings are a competitive issue (48% yes/52% no), it was almost unanimous (92%) that a collaborative – exchanges, market participants, SEC – solution could be found for a new strike listings plan.

Innovation, Costs & Best Ex – There are 16 exchanges in the options market under 5 main parent groups (exchange details on a later page), with the top 3 exchanges holding a 46% market share. For exchange groups holding multiple exchange medallions, each one operates a maker-taker and a payment for order flow exchange. The others offer innovative (price, speed) market solutions. When you multiply out the number of strikes across exchanges, it creates a complex environment adding to search costs to prove best executions. Brokers have lots of technology enabled tools to connect to multiple points, but it is costly to provide two sided quotes across all of these exchanges. Do market participants need to connect to all of these to prove best execution (best ex)? Best ex means different things across orders – different types of investors with different end goal for orders – making it difficult to measure (and prove to regulators) best ex.

Trading Trends – With ADV +15% Y/Y, markets remain healthy and active. Panelists/speakers indicated there has been a shift to short-dated products; 10-day instruments now 40% of daily volume vs. 20% historically, as there is “tons” of liquidity in the short dated making it more profitable for traders/investors. Retail customers continue to choose weeklies, as there are lots of choice on how far out products go or premiums paid. Additionally, complex orders are becoming a bigger part of the market.

Download the full pdf report for volumes and market share updates.

Equity Market Structure Conference Highlights

What Is Best Ex? SEC Commissioner Elad Roisman stressed that to him market structure should be about stability and reliability, and the SEC’s mission includes: protecting investors; maintaining fair, orderly and efficient markets; and facilitating capital formation. He also noted these factors must be balanced with changes seen in the markets since Reg NMS was implemented (increased number of exchanges, adoption of technology). This may leave the door open to reassess Rule 611 of Reg NMS: the Order Protection Rule (OPR; or trade-through rule) and guidance on best execution (best ex). Brokers have a legal duty to seek best ex, which Roisman indicated is the cornerstone of market integrity.There are 13 equities exchanges under 4 parent groups, with 3 more announced to launch within the next year (exchange details on a later page). The top 3 exchanges hold a 36.5% market share of total volumes, or 61% of on exchange volumes (off exchange volumes= 35.7% of total). While most exchange groups open maker-taker and inverted exchanges, other medallions offer segmentation for market participants by price or speed.

How Can We Fix the SIP? One panelist channeled Ricky Bobby, noting “if you’re not first, you’re last.” Speed matters in trading – brokers need to see market data and be able to react right away – but content matters as well. The Securities Information Processors (SIPs) consolidate top of book bid/ask quotes and trades from every trading venue into a single data feed. Traders do not view the SIP as adequate to meet their best ex requirements. Since it is consolidating quotes, there is a latency factor with the SIP versus proprietary data feeds, which come directly from an exchange. Panelists noted there will always be a latency delta for inclusion in the SIPs, but it could and should be decreased.Additionally, the SIP does not provide depth of book (number of buys/sells, at what prices and volumes). And panelists feel the SIP is missing other key analytic factors such as imbalances and odd lots (order auction amount less than the standard 100 shares). High priced securities tend to trade in odd lots. In 1990, 80% of S&P 500 stocks priced over $50, but no stocks priced over $200. Today, 27% of stocks are over $50, and 65 auction stocks are over $200. Yet, odd lot data is not included in the SIP. Traders view this additional data – depth, imbalances, odd lots – as important differences between the SIPs and prop feeds. Further, panelists noted the SIP creates a single point of failure. If an exchange goes down during the day, traders can seamlessly switch to another exchange. One panelist noted that if the SIP goes down, there is no alternative, which is “a huge problem.”

Now the question becomes how to update systems and guidance to match today’s markets? SEC Director of the Division of Trading and Markets Brett Redfearn provided his thoughts on these issues, acknowledging that best ex means something different for each order, based on different types of clients and end goals for a trade. He also questioned whether all brokers really need to consume all of the data available on every order. He further commented that OPR may not always help achieve best ex. The conclusion is market participants know the SEC is reviewing these aspects of market structure, but it will take time and involve “levels of rigorous reviews,” in order to prevent any unintended consequences.

Download the full pdf report for volumes and market share updates.


Katie Kolchin, CFA
SIFMA Insights