The US options market has become so complicated it may be hampering access to liquidity, according to research by Tabb Group.
Options traders are facing four major challenges; the growing number of exchanges, diverse market models, growing options product range and accelerating trading velocity, Tabb said.
The number of options series listed on US exchanges has grown exponentially in recent years, with well over 800,000 available in 2014, up from just over 600,000 in 2013 and less than 300,000 in 2007.
With 12 options exchanges now competing for flow, each in constantly tweaking their rules and protocols in order to influence the routing of order flow. Tabb said solid order routing strategies are crucial to be able to navigate this ever-changing marketplace, meaning it is a significant competitive differentiator for brokers.
This has also resulting in a major increase in the amount of options data that must be analysed by traders.
Andy Nybo, head of derivatives research at Tabb, said: “Peak message rates are approaching 10 million messages per second, putting massive strains on technology infrastructure at sell- and buy-side firms alike.
“The ability to analyse real-time data is important, but what these firms need is the ability to analyse historical tick data to refine execution strategies that contribute to improved returns.”
The result is trading firms are having to invest significant sums into their analytics capabilities to be able to evaluate the impact of fees and liquidity on trading performance.