In 2019, investors in the US traded about 4.9 billion equity option contracts. By 2023, that number had risen to 11 billion. Growth in India has been even more explosive: In 2023, the number of equity index options that traded on the National Stock Exchange of India and the Bombay Stock Exchange topped 84 billion contracts – over half the futures and options traded in the entire world.
In a recent panel discussion at the International Futures Industry Conference in Boca Raton, FL, several senior executives of the equity options trading ecosystem weighed in on the reasons for the explosive growth, why they think trading volume will continue to climb, and what the industry is doing to keep customers and regulators happy.
Some observers have predicted that the enthusiasm for options would prove to be a temporary fad created by the special conditions during the pandemic. But executives from two of the world’s largest options exchanges are convinced that the opposite is true – the enthusiasm for options is only just beginning.
Dave Howson, president, Cboe Global Markets, one of the largest operators of options markets in the US, said investors are understanding the utility of options better these days. Many are seeing options not just as a way to make lottery-style bets on big moves in the stock market, he said, but as a useful tool for hedging risk.
Sriram Krishnan, chief business development officer of the NSE, the largest derivatives exchange in India, said that the recent boom is sustainable in India too. “I think this is only the beginning of something bigger,” he said, “because the retail population is only now beginning to come to the marketplace.”
Unlike China, where retail investors constituted 70-80% of trade volume at one point, in India, retail customers still account for only 35% of the volume, according to Krishnan. Today, 90 million investors are trading on the NSE, with 3 million more signing on every month. Technology is also driving volume, Krishnan said, as more high-frequency traders go online.
But most of all, the rising volume reflects the fact that India is “doing very well as a country and as an economy.” Between strong regulatory safeguards and the fact that India is now the world’s fifth-largest economy, people have a lot of trust in Indian capital markets, he said.
They both agreed, however, that the pandemic marked a key inflection in this trend.
“It’s the pandemic, people are home. They’ve got time on their hands, they’ve got stimulus checks in their pockets,” said Howson. “They’ve got no sports, and access to phenomenal technology. Now the online retail brokerages combined with widespread zero commissions literally put in the hands of retail investors in the United States the ability to democratize access and increase accessibility to the marketplaces.”
On top of all that, retail investors now had access to real time news, powerful tools, real time data, and a growing number of equity option products to choose from: the number of products grew from 4000 to 6000 and the number of possible contracts jumped from less than a million to 1.6 million.
In India too, interest began to rise in 2019 and then really took off the following year. “Twenty-twenty, when the pandemic erupted, was a defining moment,” Krishnan says. “And since then there has been no looking back.”
Retail investors are drawn to options in part because they give them the ability to be more precise about their trading goal, according to Steve Quirk, chief brokerage officer of Robinhood, the popular online trading platform.
Options also reflect the fast-moving nature of business today, he adds. “If you look at the big picture of the way people are investing, companies used to come out, IPO, and be in business for hundreds of years. It doesn’t happen anymore, so your duration better change. Otherwise, you’re going to be sitting with a portfolio that might not be that valuable.”
Educating the retail investor
Another big trend is the growth in the trading of options with shorter durations, and in particular, the zero-day-to-expiry options. These contracts expire the same day that they are bought, which lowers the cost and allows trades to focus on events taking place the same day, such as an earnings announcement or a press conference. Cboe estimates that 48% of the volume in its flagship SPX options, which track the S&P 500, are bought and sold on the same day that they expire.
Quirk says the enthusiasm for zero day options reflects shortening attention spans. “Look, everything we do in life, now people have a shorter attention span, and we shouldn’t expect investing to be any different,” he says.
“I think that’s not a bad thing, as long as they’re doing it in a suitable manner,” Quirk adds. Right now, investors are trading in single-name options, but as soon as the market gets more volatile, he says, he expects they will move over to broad-based exchange-traded funds.
But are these new retail customers trading in a suitable manner? A recent study from the Securities and Exchange Board of India, the nation's main market regulator, found that 9 of 10 Indian option investors lose money. That poses the question of whether regulators will clamp down on retail participation to protect them from losses.
In the US, the industry already provides some tools for investor education. Howson lauded the investor education program organized by the Options Institute, Cboe's educational arm, and the Options Clearing Corporation, the main clearinghouse for the industry.
Robinhood too is investing in investor education, according to Quirk, but in a form that he says is better suited to the attention span of today’s investors. “We do it in the [trading] pathway, in short snippets. Think of a Tik Tok video – that’s essentially the way they consume education. And that’s the way they find it helpful,” Quirk says.
Krishnan acknowledged that young Indian investors need more education. “They are just taking chances,” he says. “And you have a situation where taxi drivers and rickshaw drivers are trading options. It’s not the most of ideal scenarios to be in,” he says. “While whatever is happening is happening, we have got a moral responsibility as a frontline regulator to make people aware of the downside risks.”
In the past few years, volatility has been low in the Indian market. “The black swan event hasn’t happened, and people haven’t got cleaned out in recent memory…people think nothing can go wrong here...but we think that they need to be more educated and more aware of how things can go wrong, and then do what they want to do, so we have suggested a couple of frameworks to the regulators,” Krishnan says.
But investors are learning, Howson says. If they buy SPX options on expiry dates, for instance, Cboe’s records show that 95% buy them in capped-risk trades. About half of the exchange’s retail customers are following more complex strategies, such as buying and selling spreads, that limit the investor's risks, according to Howson.
Quirk argues that ultimately nothing is more educational than learning by doing, even if that means losing a few hundred dollars in the market. “Investing and trading is like riding a bike. You can read a lot of books about it, but I’ll put a bike up here and I’d love to see you ride it off a book. You need to do it,” he says.
Meeting the technology challenge
All that growth is driving some major technological challenges. The surge in options trading leads to a corresponding surge in the message traffic at the exchanges, and that requires investments in capacity at all levels of the industry.
The NSE receives 22 billion order messages every single day, all within the 6 hour and 15-minute trading day, and of those orders, investors complete 250 million trades, according to Krishnan. In the US, markets log 140 billion messages a day, according to Howson.
The trading firms that act as market makers have to consume all of that data in order to continuously update their price quotes. Matthew Haraburda, president of XR Trading, a proprietary trader in Chicago, provided his insights on the capacity challenge, confirming that his firm pulls in all of the data published by the exchanges and instantaneously incorporates that data into its pricing model.
Haraburda is confident the markets will be able to handle the rising volume while maintaining low latency. “Ultimately, it’s an engineering problem,” he says. But despite the quantity of data, he doesn't think artificial intelligence will be part of the solution, mostly because of the need for speed – market makers measure the time it takes to update a quote in microseconds. “You’ve got to update your quotes very quickly,” Haraburda explains. “The amount of time you have to do analysis… is extremely limited.”
So far, Howson says, the Cboe has been able to keep up. “So far, Moore’s Law has kicked in a few times, and there have been hardware innovations, and the markets have, to this point, certainly been able to keep up,” he says.
At the NSE, Krishnan says, the exchange is opening its eleventh data center in a few months and is beginning work on a huge facility that will ensure there is no storage problem for the next ten or 15 years.
Keeping up is critical, in Krishnan’s view. Unlike Facebook or X, an exchange can’t just turn down business. “As exchanges, we can’t say, you know what? We’re not able to manage the orders or manage the trades…and the regulators are also equally keen that we don’t even slow down,” Krishnan says.
