The US exchange-traded equity options markets is to undergo a technological revolution, according to a new report from research firm Celent.
The study, ‘Electronic Equity Options Trading: A Technology Transformation for a New Market Structure,’ predicts that 85% of the overall volume of US exchange-traded options will be traded electronically by 2012, up from 71% in 2008, as more institutional block and complex orders move towards automated execution methods.
Celent claims lower-latency trading and order routing systems at exchanges, along with customised algorithms and multi-asset trading, will significantly alter the landscape between 2008 and 2012. It also contends that competition in the options market will force more technology transformations to satisfy a broader and growing investor appetite for the asset class.
The growth of the options market in the US, according to Celent, can be attributed to several factors. These include the development of multiple-listed products, penny pricing implementation and increased retail and institutional buy-side interest. From 2005 to 2007, contract volumes increased by 30-40% each year and the report expects this trend to continue, with a 25% compound annual growth rate through to 2012.
As the equity options market begin to share attributes with cash equity markets, such as adoption of algorithmic and direct-market-access trading, OMS/EMS use and maker-taker pricing, the study predicts that much of the technology can be imported to equity options from cash equities.
However, the study outlines challenges relating to technology system requirements that options market participants will have to address. These include an improvement in algorithmic and smart order routing capabilities – to deal with the fragmented options exchange landscape – and the evolution of multi-asset-class trading systems from technology systems vendors that offer improved data handling and complex event processing for high data users.
In addition, the report says exchanges will have to enhance trade matching systems, replace or migrate manual systems and handle significantly faster quote updates from market makers.
“Options markets are still comparatively fragmented in liquidity and see a greater volume of messaging and quote updates than cash equities. With a market structure that effectively only allows trades to be executed on exchanges, systems enhancements have been historically concentrated on these exchanges,” said David Easthope, senior analyst with Celent’s capital markets group and coauthor of the report, in a statement. “Technological responses to the trading arms race will be widespread and come in the form of direct market access, multi-asset trading capabilities, algorithmic trading, hardware and software upgrades, and co-location offerings.”