Over-confidence in US equity options led a steep growth in venues since 2010, but new entrants will face stricter barriers to entry as technology requirements increase and trading volumes continue to plateau, a report has found.
The report, from consultancy Aite Group, said the five new equity options exchanges that have launched since 2010, bringing the total number to 12, were driven by expected growth in volumes, which has not occurred. This, alongside a spate of recent IT glitches, means these venues face growing pressure to update technology and oversight of trading operations, adding to operational costs.
After a decade of consistent double-digit growth, trading volumes in equity options reached a peak in 2011, falling almost 13% in 2012. Aite foresees 2013 as another year of flat equity options activity, declining further from 2012 volume figures, which will put added strain on the exchanges competing for flow.
“Ultimately, whether 12 is enough will probably come down to the steep cost of maintaining a robust technology infrastructure, both in dollar terms as well as in human resources due to its increasing complexity to maintain operational efficiency,” the report, authored by Aite senior analyst Howard Tai, read.
The report states that managing technology will be key to these venues’ success, as venues deal with growing complexity associated with increased technology oversight.
“Seven exchange holding companies operate 12 options exchanges, most of them quoting in excess of 400,000 options series in rapid-fire fashion while providing a low-latency environment for order routing and execution,” the report read.
The report cites the large-scale order routing issues experienced by Goldman Sachs due to faulty logic in its algorithmic engine in late August as a need to develop common industry standards to handle erroneous trades from the 12 venues.
“IT glitches occurring at a number of exchanges at an increasing frequency, which disrupt trading and reduce market participants’ confidence in the robustness of the technology infrastructure at the exchanges, the market makers and the order-routing brokers,” the report read.